02 Financing Your Business Idea18.8.10.Final Ppt
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Transcript of 02 Financing Your Business Idea18.8.10.Final Ppt
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FINANCING YOUR
BUSINESS IDEADANIEL ASIEDU
MD/CEO
ZENITH BANK
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We will begin our discussion under the assumption that:
You already have an idea or hope to have one soon
The idea is well thought out, well researched and
well discussed with persons with experience in
business
You have determined your suitability and capability
for that kind of business
INTRODUCTION
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IDEA TO BUSINESS PROCESS
Generation of BusinessIdea
Determine Your
Suitability for theBusiness
Carry out a FeasibilityStudy
Seek Guidance from
Others
Maintain Proper
Records
Manage and Grow the
Business
Commence theBusiness
Seek AppropriateFinancing
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No matter how optimistic you are about your
business idea, the reality is, statistics have proven
that new businesses are probably more likely to fail
than existing businesses
Due to data unavailability in Ghana, we use a few US
statistics to explain this
FACTS ABOUT NEW BUSINESSES
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The US Bureau of Census reports that 25 percent ofbusinesses fail in the first year, 55 percent fail in the
first five years and 71 percent fail on or before the
tenth year
Furthermore, of those that survive, The US National
Federation of Independent Business (NFIB) Education
estimates show that over their lifetime only 39
percent are profitable
Hence, over their lifetime, only 11 percent of new
businesses are profitable
FACTS ABOUT NEW BUSINESS (Cont)
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From the financiers perspective, the highfailure rate of new businesses suggests
that very few ideas result in successfulbusiness ventures
This implies that a thorough evaluation ofthe potential of the idea is needed before itcan be financed
FINANCIERS PERSPECTIVE
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The more convincing the feasibility study is, themore likely it is for the business to succeed, andthe more likely a financier will take a serious lookat it
Broadly, the feasibility study should address thefollowing viability indicators:
o
Market Viabilityo Technical Viabilityo Business Viabilityo Management
o Economic and Financial Viability
FINANCIERS PERSPECTIVE (Cont)
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A financier will take a serious look only afteryou have ascertained that the idea passes allthe above
It is at this stage that appropriate fundingcan be sought. Financiers will view all
proposals purely from the businessperspective
We now discuss alternative forms of finance
FINANCIERS PERSPECTIVE (Cont)
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There are broadly two forms of finance i.e. Equitycapital and Debt capital
Equity is capital that is not ordinarily repaid toinvestors in the normal course of the business. Itrepresents risk capital and is typically raised frompromoters of the business
Debt capital, on the other hand, is capital that abusiness acquires by taking out a loan or some otherform of financing which must be repaid at some
specific future date
FORMS AND SOURCES OF FINANCE
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Venture Capital Companies: Investment companies who
provide capital for businesses with profit potential and exitafter a period
They typically finance viable young companies/ideas,
require less leverage and invest the equity funding intoworking capital to grow the business. Examples are ActivityVCF, Bedrock VCF, Fidelity Fund II, Gold VCF and Ebankese
VCF
Private Equity (PE): funds which invest in relatively matureand viable businesses. They typically buy shares fromcurrent owners with the equity funding and require moreleverage to grow the business. Examples include ICS PE Fundand Oreos
EQUITY (Contd)
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Government-Backed Grants: These are facilities granted bygovernment for business start-ups and expansions.Investments are usually targeted at strategic industries
Donor Agencies: Strategic funds for investing in certainselected industries. Each fund has its peculiar requirements.Examples include IFC and AFD
Stock Exchange: Financial market for shares and bonds usuallyused by expanding, growing and matured businesses
EQUITY (Contd)
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DEBT
The forms of debt include:
Loans from Family, Friends, Partners etc Government Backed Grants
Term Loans and Overdrafts Project Financing Trade Financing Asset Financing i.e. Leasing, Hire Purchase Guarantees Factoring Invoice Discounting Buyers Credit Suppliers Credit
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Loans from Family, Friends, Partners etc: Debtprovided to the owner usually to support start up,operational and expansion costs
Government-Backed Grants: These are facilitiesgranted by government for business start-ups andexpansions. Investments are usually targeted at
strategic industries. An example is the JapaneseGrant with the Ministry of Finance
DEBT (Contd)
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Term Loans and Overdrafts: Facilities granted byfinancial institutions to businesses as working andinvestment capital
Project Financing: involves non-recourse financingof a development and construction of a particularproject. Normally used in financing huge projects
DEBT (Contd)
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Trade Financing: Includes Letters ofCredit, Bills for Collection, Bankers
Acceptance, Export Financing, etc used tofinance trade transactions
Asset Financing i.e. Leasing, HirePurchase: a form of lending used tofinance the acquisition of fixed assets
DEBT (Contd)
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Guarantees: A mix of Performance Guarantees,Advance Payment Guarantees, RetentionGuarantees, etc provided by banks to facilitatecontractual and financial arrangements
Factoring: a non-recourse form of debt employedin financing receivables so as to release workingcapital for the business
Invoice Discounting: debt employed in financingreceivables to be repaid on collection fromcustomers.
DEBT (Contd)
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Buyers Credit: A financial arrangement in which afinancial institution in the exporting country extends aloan directly or indirectly to a foreign buyer to financethe purchase of goods and services from the exportingcountry
Suppliers Credit: A financing arrangement under
which an exporter extends credit to the buyer in theimporting country to finance the buyers purchases.
DEBT (Contd)
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The best practice in finance is that the form of capitalwhich is invested in a business depends critically onthe firms peculiar features. Mainly, its stage in thebusiness life cycle. In general,
Start-ups are best financed with equity (either
owners equity, private equity or venture capital)
STAGE USAGE OF FINANCE
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Expanding/Growing companies are financed byPrivate Equity and/or Venture Capital, in addition to
owners equity and debt
Mature companies are likely to make use of
internal financing, as well as several forms of debtand equity
STAGE USAGE OF FINANCE
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DIFFICULTY IN ACCESSING FINANCE
START-UP
BUSINESS
EXPANDING/GROWING
BUSINESS
MATURE
BUSINESS
Less Difficult
Extremely Difficult
Not Difficult
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TIPS
Not every business idea will require external funding
It is always more difficult to receive external fundingfor start-ups
The level of a financiers interest is positivelycorrelated with the level of the promoters financial
commitment
Financiers prefer projects with shorter repayment
periods
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TIPS (Cont)
You are more likely to receive external funding forprojects with smaller start-up costs
Where possible, the project/idea should be phasedif the total funding requirement is huge
Financiers will view every business idea from apurely business perspective
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THANK YOU
www.zenithbank.com.ghin your best interest