Chapter 6 Flashcards
Financial Requirements
- Permanent Capital
- Working Capital
- Asset Finance
Permanent capital
used to finance the start up costs, or major developments / expansions.
ideally done if the firm can afford it.
Usually by investements
Working capital
Short-term finance, to bridge the gap on working expenses.
Usually needed in creditor/debitor type of businessesA
Asset Finance
Medium to long-term finance
For the purchase of tangible assets
The most important asset to manage
Cash
Sources of financing
Internal Sources(Equity Capital)
External Sources(Debt Capital)
Lease Financing
Traditional Methods(Iqub and Edir)
Crowd Funding
Micro-finances
Internal Sources - Equity Capital
Owner’s capital or owner’s equity represents the personal investment of the owner(s) in a business
Sources of Equity Capital
- Personal Saving
- Friends and Relative
- Partners
- Public stock / sale
- Angels
- VC
External Sources - Debt Capital
is the external financing that small business owner has borrowed and must repay with interest.
Sources of Debt Capital
- Commercial banks
- Micro-finances
- Trade-credit
- Suppliers
- AR financing
- Credit unions
- Bonds
The five C’s of Bank Lending Decision
Capital - stable capital base
Capacity - able to meet financial obligations
Collateral - security for the loan
Character
Conditions
Lease financing
where the owner of an asset gives another person, the right to use that asset against periodical payments
Types of Lease
Finance Lease
Operating Lease
Finance Lease
the lease where the lessor transfers substantially all the risks and rewards of ownership of assets to the lessee for lease rentals
Phases of finance lease
- Primary period - non-cancellable period and in this period, the lessor recovers his total investment through lease rental.
- Secondary period(peppercorn rental)
Operating Lease
risks and rewards incidental to the ownership of asset are not transferred by the lessor to the lessee.
Advantages of Lease financing
- assured regular income
- preservation of ownership
- benefit of tax
- high profits
- recovery of investment
Limitations of Lease financing
- unprofitable incase of inflation
- double taxation
- damage of asset
Crowd funding
method of raising capital through the collective effort of friends, family, customers, and individual investors or even from the general public
Benefits of Crowd Funding
Reach - crowd funding platforms
Presentation - looking at business from a top level
PR & Marketing
Validation of Concept - validate offerings
Efficiency
Types of Crowd Funding
Donation based - no financial return to investors or contributors
Rewards based - contributing in exchange for a reward. Typically a product or service
Equity based - contributors become part owners
Microfinance
financial services, to entrepreneurs, small businesses and individuals who lack access to banking services with high collateral requirements
Pioneer of modern microfinance
Dr. Mohammad Yunus
