cie lecture 16 sources of entrepreneurial finance
TRANSCRIPT
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7/31/2019 CIE Lecture 16 Sources of Entrepreneurial Finance
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Sources of entrepreneurialfinance
Sources of entrepreneurialSources of entrepreneurialfinancefinance
Code 0454- Enterprise
Lecture 16
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Why entrepreneurs needmoney
They are just starting and need to buypremises and equipment.
They have an opportunity to introduce anew product or service.
A major item of equipment or buildingneeds to be brought up to date.
Entrepreneurs need money at times because:
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The sources of funds
Owners funds savings of the owner or anadditional mortgage taken out on their house.
Profits profits which have been retainedand not paid out as dividends.
Loans from a bank or other financialinstitution.
Government grants available for specific
reasons, eg expanding in a deprived/remotearea.
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The sources of funds Hiring and leasing this saves having to
buy expensive items outright as paymentsare made in regular instalments.
Issuing shares only applies to publiclimited companies whose shares are boughtand sold on the Stock Exchange.
Selling assets such as unwanted buildings
or spare land. Venture capital/Business Angels finance
from a investors which specialises inlending to successful entrepreneurs oftenin exchange for shares/profits
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The amount
required
Factors affecting the
choice of funding
The length of timefor which the money
is needed
The risk
involved
The cost of
the money
Loss of
control
Advice
available
Choosing a
funding method
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Making the choice internal sources
Owner(s)makedecision
Reduces reservesand possibly future
dividend payments.May be insufficientfor needs.
Retained profit
Could loseeverything ifbusiness fails
Owner keepscontrol
Ownersfunds
DisadvantagesAdvantagesSource
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Making the choice
other external sources
Owner may lose
some control overbusiness
Large amount may
be available +advice
Venture
capital
Only appropriateif have unusedassets!
Converts unuseditems into capital
Sellingassets
Only for Big Cos
Shareholders paiddividends
Large amountsavailable, neverrepaid
Issuingshares
DisadvantageAdvantageSource
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Evaluating various types of creditEvaluating various types of creditavailable to the entrepreneurs.available to the entrepreneurs.
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Who uses Credit? Consumer Credit
Credit used by people forpersonal reasons.
Commercial Credit
Credit used by entrepreneurs.
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Types of CreditCharge Accounts most common type of short-term or medium-term credit. Regular Charge Accounts
Require that you pay for purchases in full withina certain period of time.
Revolving Charge Accounts Allows you to borrow or charge up to a certain
amount of money (credit limit) and pay back apart or the entire balance each month.
Budget Charge Accounts Allows you to pay for costly items in equal
payments spread out over a period of time.
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Credit CardsSingle-Purpose Can only be used to buy goods or services at the
business that issued the card. Examples: JC Penney, Sears
Multipurpose Similar to a revolving charge account. May be used at several locations. Examples: Visa and Master Card
Travel and Entertainment
Similar to regular charge accounts. Must be paid in full each month. Example: American Express
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Banks and OtherFinancial Institutions Single Payment Loan
Debtor pays off loan in one payment.
Promissory Note Written promise to repay with interest.
Installment Loan
Repaid in regular payments.
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Instalment LoansTypes: Student, mortgage, automobile, etc. Secured vs. Unsecured
Secured loans are backed by collateral (helpguarantee the repayment of a loan).
Closed vs. Open Ended Closed-end credit is used for a specific purpose and
involves a definite amount of money. Open-end credit gives you a certain limit on the
amount of money you can borrow.
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Seller-Provided Credit Many stores/debtors provide credit
to entrepreneurs.
Offer purchasers a 30, 60 or 90 day
payment
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Consumer FinanceCompanies
Specialize in loans to people with poorcredit ratings.
The cost of credit is higher thanother institutions.
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Other Sources of Creditfor Businesses
Small Business Administration Offers a number of financial, technical,
and management programs to helpbusinesses.
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Determining the advantages andDetermining the advantages anddisadvantages of using credit.disadvantages of using credit.
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Advantages Immediate Possession Convenience
Buy now and pay later.
Emergencies Saving Money
Buy an item while it is on sale.
Credit Rating Establish a favorable credit rating. Growth of the Economy
Buying goods will help the economy expand.
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Disadvantages Overbuying
Most common hazard.
Careless Buying Comparison shopping may not be a
priority
Encourages impulse buying
Higher Prices Some stores offer discounts for cash
sales.
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Disadvantages continued
Overuse of Credit Too much is owed unable to pay back.
Credit Fees Interest paid on balance
Habit Forming
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Results of Overuse Garnishment of Profits
Money deducted from profits for moneyowed.
Repossession Loss of property because of failure to
repay loan.
Bankruptcy