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Entrepreneurship

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Entrepreneurship ­ MGT602
VU
PERSONAL FUNDS
A.
Few new ventures are started without the personal funds of the entrepreneur.
1.
In terms of cost and control these are the least expensive.
2.
They are essential in attracting outside funding.
B.
Outside investors want the entrepreneur to demonstrate financial commitment.
1.
This level of commitment is reflected in the percentage of total assets available the
entrepreneur has committed.
2.
An outside investor wants an entrepreneur to have committed all available assets.
3.
It is not the amount but the fact that all monies available are committed that makes
outside investors feel comfortable.
FAMILY AND FRIENDS
A.
After the entrepreneur, family and friends are the next most common source of capital.
B.
Family and friends provide a small amount of equity funding for new ventures.
1.
It is relatively easy to obtain money from family and friends.
2.
However, the amount of money provided may be small.
3.
If it is in the form of equity funding, the family member or friend has an ownership
position in the venture.
4.
If they have direct input into operations of the venture, it may have a negative effect on
employees or profits.
C.
To avoid potential future problems, the entrepreneur must present the positive and
negative aspects and the nature of the risks of the investment.
1.
To minimize any future problems, keep the business arrangements strictly business.
2.
Any loan should specify the rate of interest and the proposed repayment schedule.
3.
The entrepreneur should settle everything up front and in writing.
4.
A formal agreement specifying details of the funding helps avoid future problems.
D.
The entrepreneur should carefully consider the impact of the investment on the family
member or friend before it is accepted.
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Entrepreneurship ­ MGT602
VU
Lesson 33
PRO FORMA SOURCES AND USES OF FUNDS
COMMERCIAL BANKS
Commercial banks are the most frequently used source of short-term funds.
1.
This is debt financing and requires some collateral, some asset with value.
2.
This collateral can be business assets, personal assets, or the assets of the cosigner of the
note.
Types of Bank Loans
1.
Accounts receivable loans.
a.
Accounts receivable provide a good basis for a loan, especially if the customer base is
creditworthy.
b.
A bank may finance up to 80% of the value of the accounts receivable.
c.
A factoring arrangement can be developed whereby the factor (bank) actually buys the ac-
counts and collects the money.
d.
If any of the receivables are not collectible, the factor sustains the loss, not the business.
e.
The cost of factoring is higher than the cost of securing a loan against the accounts
receivable.
2.
Inventory loans.
a.
Inventory is often a basis for a loan, particularly when inventory is liquid and can be sold
easily.
b.
Finished goods inventory can be financed up to 50% of value.
c.
Trust receipts are a type of inventory loan used to finance floor plans of retailers such as
auto dealers.
d.
The bank advances a large percentage of the invoice price of the goods and is paid a pro
rate basis as the inventory is sold.
3.
Equipment loans.
a.
Equipment can be used to secure longer term financing up to 3 to 10 years.
b.
When new equipment is bought, 50 to 80% of value can be financed.
c.
In sale-leaseback financing the entrepreneur "sells" the equipment to a lender and then
leases it back.
4.
Real estate loans are easily obtained to finance land, plant, or building, usually up to 75% of
value.
Cash Flow Financing
Cash flow financing -- or conventional bank loans -- include lines of credit, installment loans, straight
commercial loans, long-term loans, and character loans.
a.
Lines of credit are the most frequently used.
b.
The company pays a "commitment fee" at the start then pays interest on outstanding bor-
rowed funds.
1.
Installment loans.
a.
Installment loans can be obtained by a going venture with a track record of sales and
profits.
b.
These funds are used to cover working capital needs, usually for 30 to 40 days.
2.
Straight commercial loans.
a.
In this hybrid of the installment loan, funds are advanced to the company for 30 to 90
days.
b.
These self-liquidating loans are used for seasonal financing.
3.
Long term loans.
a.
These loans are usually only available to more mature companies.
b.
Funds are available for up to 10 years with the debt repaid according to a fixed interest
and principle schedule.
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Entrepreneurship ­ MGT602
VU
4.
Character loans.
a.
When the business does not have assets to support a loan, the entrepreneur may need a
character loan.
b.
These loans must have assets of an individual pledged as collateral, or have the loan
cosigned by another
76
Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN