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Raising a new Generation of Leaders

EDS 411
Entrepreneurial
Development Studies
Practical Ways of Raising Business Finance And Sustaining
Growth

Definitions of an Entrepreneur
a) Someone who organizes a business venture and
assumes the risk for it.
b) An entrepreneur is a person who has possession of a
new enterprise, venture or idea and assumes
significant accountability for the inherent risks and
the outcomes. The term is originally French and was
first defined by the Irish economist, Richard Cantillon.
c) A person who is innovative and takes the risk of
bringing the other factors of production together in a
business concern to profitably satisfy the needs and
wants of a particular segment of a market
Kehinde ADETILOYE PhD

Determinants of Amount to be Raised


1.The type of business to be invested in, which could
be
(a)Capital intensive business would require more funds,
(b)Labour intensive business would require less capital

2. Age of business: new versus old


3. Availability of Capital allowance and other
government incentives
4.The type of Ownership involved
Kehinde ADETILOYE PhD

When to raise the amount Needed


Planning is required since you would not be using all
you need at a time. The following stages are recognised
for capital needs for the business
(a) Setting up of the business (idea development)
(b) at take off (initial structures)
(c) Expansion periods
(d) When adding new lines
(e)When consolidating business lines (financial
engineering)
Kehinde ADETILOYE PhD

How to fund a Start-Up: What Type fits Your Business


Seed and venture capital funds: These are investment funds funding companies in
their seed and starting stages.
Guarantee funds: Public and private schemes or institutions providing SMEs with
guarantees when applying for loans that work with numerous banks through which the
entrepreneur applies for his or her loan. If a bank rejects your application, you are
advised to apply to several other banks.
Incubators and business angels: Focus on preseed or the very early stages of your
company. Can be one of the following:
i) public and private incubator providing financing services, or if not, offering services
for access to funding (coaching in applying for funds or loans; introduction to banks,
grant programmes or investors);
ii) associations of businessmen or consulting companies who support
entrepreneurship, with the possibility to invest in the projects they mentor eventually,
or giving access to business angels and investors.

Kehinde ADETILOYE PhD

Support programmes for funding SMEs: These fund either


enterprise creation, innovation (intellectual property and/or
turning research results into a business), or upgrading of
companies. Usually this involves grant programmes, or
projects offering loans without interest (free loans), or
eventually coaching programmes helping with access to
finances. They sometimes work through incubators or
institutions and are funded by national or international
organisations, sometimes by business associations. Collateral
or fees can be demanded of the entrepreneur.
Institutions and associations: These are either banks
specialised in providing services to SMEs, or innovation
agencies when applicable, or SMEsupporting organisations
running programmes to help startups and SMEs access
finances.
Kehinde ADETILOYE PhD

Where to raise the Finance Needed


The most obvious formal sources are the financial institutions namely (All these sources
require serious documentation) :
a) Banks generally
b) Development finance institutions in the business line or area (BOI, BOA, NERFUND). Many of
these have been re-organised)
c) Specialised agencies
d) Venture Capital Fund (more on this later)
e) Private entrepreneurs
f) Like-minded investors
Non formal sources of financing business includes borrowing
(a)
Friends and Relations (b) Informal institutions like Ajo and Esusu.
Semi formal Cooperative Thrift and Credit Societies (CTCS)
Public Domain : Crowd-funding
Kehinde ADETILOYE PhD

Starting out and Making plans


The most important and first step is the business idea. This is
the God given capital that everybody has linking to his Plans
and Purpose in business as a Pursuit. This may done in a
Partnership (Amos 3 :3)
The idea need to be fine-tuned to see how it can be nurtured
to fruition and in particular to be funded a business plan is
needed. (Richard Branson suggests a Mentor)
Nurturing the idea brings in the issue of finance to take it off
the ground.
At this stage you need to open an account with a bank with
what you have. (Financial Relationship)
Kehinde ADETILOYE PhD

The first step is your personal savings where one


exist (we need to cultivate the savings culture).
Alternatively a grant from your parents might be of
help. (Several methods are available).
Establish your business within the funds and capital
available to you. Begin to run according to plans
(you may need to revise your plans now) and
establish more concretely.
Watch your market and the cash flow to correlate
your budget with the actual.
Kehinde ADETILOYE PhD

(depending on your cycle, the above steps should not take


less than six months after take off.)
The understanding of your cycle and cash flow will enable
you to know what type of funding is most appropriate for your
type of business.
By now your bank has a history of the dealings on your
account and would be interested in your business if there are
growth prospects.
The danger in financial management is lack of prudence and
spendthrift attitude: this must be avoided at all cost.

Kehinde ADETILOYE PhD

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Running within Budget and Plans


Your budget may need review at this stage (depending on
how the actual interfaces with expected) to consolidate your
business structures. However note the following:
a. Unplanned expenditure that do not add to the business
should not be committed to.
b. Other expenses may not add immediately but must be met
(regulatory expenses).
It is important to run within budget otherwise you may need
external finance too early.
Much of your capital may go to setting up structures.
Kehinde ADETILOYE PhD

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Sustenance of Business Plans


You must operate the account you have opened in
the name of the business for it to have record with
the bank.
Regular deposits and withdrawals through the
current account give the bank some record of your
activities and confidence in your business.
With this in place, the bank may then be interested
if you discuss the issue of overdraft with them.
Kehinde ADETILOYE PhD

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Within the time you have operated the account, the bank
can safely know what your business can absorb in terms
of overdraft per time.
Overdraft when approved must be used and paid back
within shortest time frame. Interest is charged on daily
basis; swings must be seen on the account.
This encourages your bank to want to invest in your
business further.
You might now look through your initial plan to ensure
that you have covered the initial targets you set for
yourself from the onset.
Kehinde ADETILOYE PhD

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Expansion and Growth


Remember that available capital and resources at your
disposal determine how fast you can expand and grow.
Since your business requires some fixed asset it is not
good to overtrade, which often leads to illiquidity and to
business failure. More business means more working
capital (the bank can provide this).
Further than this you need long term capital to invest in
your the business, to buy fixed assets. This can be done
mainly through:
a. Equity capital (b) debt capital.
Kehinde ADETILOYE PhD

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Equity capital is the best form of reliable capital for the


business. You can raise further sums of capital by asking
others to join you in the business and supplying capital. This
makes them shareholders with you to share risks and returns.
Debt capital is good when the firm has assured business on
hand and can quickly use and repay.
The following are the concerns of debt (through the bank or
otherwise) capital:
(a). It may not come in the right amount,
(b) Funds may be delayed in coming
(c) Interest and repayment must be paid on due dates
(d) The company may be liquidated if it cannot pay creditors on
due dates.
Kehinde ADETILOYE PhD

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Innovations in Financing
Crowdfunding: the practice of raising funds from two or
more people through the internet towards a common
Service, Project, Product, Investment, Cause, and
Experience.With the following basics:
Three actors:
the project initiator who proposes the idea and/or
project to be funded;
individuals or groups who support the idea; and
a moderating organization (the "platform") that brings
the parties together to launch the idea
Kehinde ADETILOYE PhD

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Crowdfunding .
Started around 2003, but nomenclature was given
somewhere around 2006: Raised $1.5 billion in 2013.
Could be equity or Debt.
Three Basic types and Uses:
Reward based funding: to fund a once and for all projects
in a KIA or AorN campaigns
Debt Based funding: allows non-bank finance to be
raised for specific purposes
Equity Based funding : allow collective efforts of people
to raise funds for establishment of firms for good causes
Kehinde ADETILOYE PhD

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Venture capital
Long term equity finance
Investing as opposed to banks who lend
Looking for high gains
Accepting high risks
Can be involved in management of the firm
Venture capital investment is illiquid
Venture capital is normally made available by
Development agencies, angels and multilateral
organisations
Kehinde ADETILOYE PhD

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Financial Contracting
A web of contracts that binds a financier and the
entrepreneur with the following basic features:
Income is verified whenever reported income is
below a certain level
Payments to the lender are constant when income is
not verified
Financial contracting is seen as an incomplete
contract because a complete contract process can
hardly be established.
Kehinde ADETILOYE PhD

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Kehinde ADETILOYE PhD

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