PUTTING THE
BUSINESS PLAN TO
WORK: SOURCES OF
FUND
Introduction:
"Thekey for entrepreneurs is to find
investors who are going to add value to
the company as it goes along.’
-Rod Nelson
Raising the money to launch a new business venture has always been a
challenge for entrepreneurs. Capital markets rise and fall with the stock
market, overall economic conditions, and investors' fortunes. These swells and
troughs in the availability of capital make the search for financing look like a
wild roller-coaster ride.
Objectives:
At the end of the lesson, the students
should be able to:
Enumerate and discuss the
different forms and sources of
capital
Explain the importance of the 5 C's
of Credit in sourcing funds from the
viewpoint of the borrower and the
lender
Prepare an outline of financial
capital requirement of a business
endeavor
Discussion
One of the four factors of
production is capital. In this
lesson, we will be
discussing the financial
capital, its sources and
types.
Capital
Requirements
Capital requirements refers to
the amount of money needed by
a business in order to achieve its
goals. According to Asor (2009),
capital requirements also refers
to non-monetary requirements
such as ideas which are
considered by entrepreneurs as
more important than money.
Forms of Monetary Capital
(from financial viewpoint)
Wo rkin g
Fixed Ca p ita l Ca p ita l
01 refers to the money 02 refers to the fund
needed to purchase needed to finance the
fixed assets or daily operations of the
capital goods. business
Gro w th Ca p ita l
03 refers to the fund
needed in expanding,
diversifying or changing
the directions of the
business.
Sources of Capital
Informal
the safest way to raise capital for
funding a business that is by investing Fo rm a l
the money that comes from your own
pocket. This may be in the form of are from the legal
savings or proceeds from sales of entities, institutions or
personal belongings, as well as establishment.
borrowing money from close relatives
and friends can also be viable solution
to financing your start-up capital.
External Sources of Capital
Pa w n sh o p Cred it M o n ey
s Co o p era tives Len d ers
Fo rm a l
Len d in g So u rces o f
In vesto rs Cred it
Types of Credit Extended by Formal
Lending Institutions
In term ed ia te
Lo a n s Lo n g -term
Lo a n
Sh o rt Term These loans are These loans are
These are loans repayable in one to extended only to
that are basically three years and enterprises assured
payable in one requires collateral to exist over the long
year or less. securities and is paid -term period of the
These are back in installments loans. These types
normally self- over the lie of the loan of loans a repayable
liquidating, may agreement up to 10 years
come in the form
of revolving credit
Forms of Long-term Loans
M o rta g
e MORTAGE
pledging a designated property
as security or collateral for the
Bo loan
n d s BONDS
requires approval from SEC or other legal
entities, done by issuing bonds to lenders in
the form of a fixed amount of interest to the
bondholders upon maturity or call by its
holders.
Lo n g -term Co m m ercia l
Pa p ers (LCP)
carries a fixed return promised by the issuer
regardless of the operational outcome of the
business of the issuer.
So u rces o f Sh o rt Term Lo a n s
1. Commercial banks
2. M erchandise suppliers
3. Credit card companies
4. Capital equipment suppliers
5. Leasing companies
6. Receivable factors
7. D eferral of payables in
general
Guidelines in Borrowing
1. Evaluate yourself whether you are in good position to borrow. Be prepared to
put up capital.
2. Estimate accurately the amount you need to borrow.
3. Choose the bank to borrow, preferably the one nearest to your place of
business
4. Choose bank depending on the size and status of the business and the
purpose of the loan.
5. In comparing banks, determine the following:
-Repayment period
-Interest rate and processing charges
-Mode of release of funds (lump sum or installments)
-Mode of repayment (annual, semi-annual, quarterly or monthly) -
-Collateral and other requirements
-Other restrictions
5C's of Credit
1. Collateral- refers to the fixed assets or real properties that serve as the
borrowers guarantee to the creditors, such that in case the borrower fails to
repay the loan, the collateral may be seized by the creditor.
2. Capacity - refers to the ability of the borrower to repay the loan, This may be
determined by the value of the business, the borrower's work, real property
value and others.
3. Character - refers to the personal standing. Of the borrower in his community,
as well as his own personal credibility.
4. Contract- an agreement which defines the obligations of parties.
5. Conditions - refers to the terms and conditions set forth in t the contract or
agreement in terms of the amount, mode of payment, interest rates, penalties,
and sanctions.
Su m m a ry
A new business project need not have substantial start-up capital
requirement nor does one have to be a millionaire to start an
entrepreneurial business endeavor. Neither a building a building nor a
fully furnished office be made a requisite to be able to open the
business. In fact, many entrepreneurs have commenced their
businesses out of shoestring capital or with little amount as what is
their savings account. O thers literally do not have money or capital, but
have good business ideas and the guts, as well as courage to start the
business using someone else's money. If one has good idea worth
pursuing in a business and the person concerned has all that
entrepreneurial traits, the problem should not be much of a capital or
money burden per se, but on more finding or sourcing the capital.
Self-Assessm en t: Kn o w led g e Ch eck!
D irections. Answer the following questions
accurately and concisely.
1. W hat is meant by formal sources of capital?
2. D iscuss the 5 C's of Credit?
3. D oes a person seeking financing aid have to
pass all the criteria? W hy?
4. W hat is meant by "angel investors"?
5. Should an entrepreneur forego a business
option simply because he o she has no
money?
6. W hy is borrowing from a bank risky?
Th a n ks!
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