Lecture 7 .

Finance and Investment.

Prepared by:
Dr/ Nourhan Tarek.
 Lecture 7.
Debt Financing.
Loans.
 Learning Goals.
▪ Through this lecture , we will learn how we can
finance our investments through different sources.
▪ We will focus mainly on debt financing and learn
about loans and how we can get loans from banks in
order to finance our investment.
First: Revision on Sources of
Finance.
Sources of Finance.
▪ For the company to get the finance it
wants for its investment, it has two
sources:
1. Internal Sources.
2. External Sources.
Internal Sources of
Finance.
▪ Internal sources of finance “are the
sources of finance or capital for
businesses which are generated by the
business itself in its normal course of
operations”.
▪ Some examples for the internal sources of
finance:
1. Retained Earnings “the most common
one”.
2. Sale of Assets.
External Sources of
Finance.
▪ External sources of finance “are those
sources of finance which come from
outside the business”.
External
▪ The External Sources of Finance are Equity
Finance.
Debt
Finance. Sources of
classified as followed: Finance.

1. Equity Finance.
2. Debt Finance.
 Our Focus Today.

▪ Our Focus today will be on external

financing Especially “Debt
Financing”.
 First: Equity
Financing. Shares

▪ Equity financing “is the method of raising VCs Friends and

capital by selling company stock to Family
investors. In return for the investment, the
shareholders receive ownership interests in
the company”. Equity
▪ Some Examples of Equity Financing: Financing
1. Shares.
2. Venture Capitals (VCs). Angel
Partners
Investors
3. Angel Investors.
4. Friends and Family.
5. Partners. Personal
Savings
6. Personal Savings.
 1. Shares.
▪ When a company sells shares to other
investors, it gives up a piece of itself as a
way to raise money to finance growth.
Companies that are more ambitious open
their shares up to the public. When a
company goes public and sells shares of
stock, it's selling many pieces of itself to
whoever wants to buy. In most cases this is
the quickest way to amass large
amounts of cash to finance growth.
 2. Venture Capitals
(VCs).
▪ Venture capitalists “are professional investors or
firms who identify promising companies and
sink money into them in exchange for a share of
ownership”.
▪ This type of equity investor differs from friends
and family and angel investors in that they are
usually only interested in high value.
▪ When a venture capitalist invests in a high-growth
company, the investor expects to either be a
member of the company’s management team or
sit on its board of directors, thereby taking an
active role in the operations of the business.
3. Angel Investors.
▪ An angel investor “is a person who invests in a
new or small business venture, providing capital
for start-up or expansion”.
▪ Angel investors are typically individuals who
have spare cash available and are looking for a
higher rate of return than would be given by
more traditional investments.
▪ Angel investment is a form of equity financing–the
investor supplies funding in exchange for taking
an equity position in the company.
Some examples of VCs and Angel Investors
in Egypt.
 4. Friends and
Family.

▪ Your friends and family can be excellent

sources of equity investments because,
generally speaking, they trust you and can
get excited about your vision and desire to
succeed.
 5. Partners.
▪ If you want a source of financing to your
investment, one option is to turn to the oldest form
of equity financing there is: taking on a partner.
You might tell a couple of friends that if they each
chip in money , they will have equity in the
business.
▪ In some instances, such as when everyone invests
the same amount of money, you will be equal
partners.
▪ In other cases you might want to retain a majority
stake of the business and have partners control less
than 50% of the business.
 Second: Debt
Financing.
▪ Debt financing occurs when “a firm raises money
for working capital or capital expenditures by
selling debt instruments to individuals and/or
institutional investors. In return for lending the
money, the individuals or institutions become
creditors and receive a promise that the
principal and interest on the debt will be
repaid”.
▪ Some Examples of Debt Financing:
1. Bonds.
2. Term Loans.
3. Bank Overdraft.
 1. Bond.
▪ A bond is “a fixed income instrument that represents a
loan made by an investor to a borrower (typically
corporate or governmental)”.
▪ A bond could be thought of as a contract between the
lender and borrower that includes the details of the
loan and its payments.
▪ Bonds are used by companies, and governments to
finance projects and operations.
▪ Bond details include the end date when the principal of
the loan is due to be paid to the bond owner and
usually includes the terms for variable or fixed
interest payments made by the borrower.
 2. Term Loan.
▪ A term loan “is a monetary loan that is
repaid in regular payments over a set
period of time”.
▪ Term loans usually last between one and
ten years but may last as long as 30 years
in some cases.
▪ In a return to this loan, you will pay
interest rate whether it is fixed interest
rate or floating interest rate.
 Bank Overdraft.
▪ An overdraft “is an extension of credit from a
lending institution that is granted when an
account reaches zero. The overdraft allows the
account holder to continue withdrawing money
even when the account has no funds in it or has
insufficient funds to cover the amount of the
withdrawal”.
▪ Basically, an overdraft means that the bank allows
customers to borrow a set amount of money.
There is interest on the loan, and there is typically
a fee per overdraft.
▪ As with any loan, the borrower pays interest on the
outstanding balance of an overdraft loan.
 Stop!!!
But Before starting to search for the suitable
source of finance for your business, you
have to ask yourself: “What is the Form and
Shape of my Business?”
1. Is my Business a sole proprietorship?.
2. or is it a partnership.
3. Or it has a corporate Entity?
 Sole
Proprietorship.
The sole proprietorship is the simplest business
form under which one can operate a business.
The sole proprietorship is not a legal entity. It
simply refers to a person who owns the
business and is personally responsible for its
debts.
A sole proprietorship can operate under the
name of its owner or it can do business under a
Fictitious Business Name(FBN).
The fictitious name is simply a trade name--it
does not create a legal entity separate from
the sole proprietor owner.
 Pros and Cons of Sole Proprietorship.

Pros. Cons.
▪ The sole proprietorship is a popular business ▪ A distinct disadvantage, however, is that the
form due to its simplicity, ease of setup, and owner of a sole proprietorship remains
nominal cost. personally liable for all the business's debts.
▪ A sole proprietor need only register his or her ▪ So, if a sole proprietor business runs into
name and secure local licenses, and the sole financial trouble, creditors can bring lawsuits
proprietor is ready for business. against the business owner.
▪ Because a sole proprietorship is ▪ If such suits are successful, the owner will
indistinguishable from its owner, sole have to pay the business debts with his or her
proprietorship taxation is quite simple. own money.
 Sole Proprietorship.
▪ Sole proprietorships often have their bank
accounts in the name of the owner. Sole
proprietors need not observe formalities
such as voting and meetings associated
with the more complex business forms.
Sole proprietorships can bring lawsuits
(and can be sued) using the name of the
sole proprietor owner. Many businesses
begin as sole proprietorships and graduate
to more complex business forms as the
business develops.
 Partnership.
▪ A partnership is a formal arrangement by
two or more parties to manage and operate
a business and share its profits.
▪ There are several types of partnership
arrangements. In particular, in a partnership
business, all partners share liabilities and
profits equally, while in others, partners have
limited liability. There also is the so-called
"silent partner," in which one party is not
involved in the day-to-day operations of the
business.
 Limited Liability
Company (LLC).
▪ A limited liability company (LLC) is a
business structure in the United States
whereby the owners are not personally
liable for the company's debts or
liabilities. Limited liability companies are
hybrid entities that combine the
characteristics of a corporation with
those of a partnership or sole
proprietorship.
 Corporate Entity.
▪ A corporation is a type of corporate entity that is
formed specifically to perform activities, such as
running a business, while being officially treated in
many ways as an individual. Although it may
consist of many different people, such as directors,
officers, and shareholders, a corporation is a legal
entity in and of itself.
▪ Separate from all others, a corporation may, among
many other things:
1. Sue and be sued
2. Buy property
3. Open a bank account
4. Participate in contracts
5. Issue stock
 Corporate Entity.
▪ Everyone who buys stock in a corporation
owns a part of it. Directors and officers
control the corporation and oversee its
operations. Yet the corporation legally
remains a completely distinct entity from
all of them.
▪ Additionally, the artificial form of the
corporation allows for perpetual
succession. So, it may technically live
forever unless it is dissolved.
Now we come to an important
Point which is bank loans.
 Bank Loans.
▪ One of the most known way to finance your
investment is “Bank Loan”.
▪ Bank loan is not an easy choice especially for
start-ups business.
▪ We have to know that the banks do not provide
loans easily especially for “start-up
businesses”.
▪ There is no guarantee for the bank that this
business will succeed.
▪ So, the banks are so touch with the start-up
businesses.
 Bank Loans.
▪ It takes money to make money, or so the old
adage goes. Many entrepreneurs launch
businesses with their personal savings, by
running up their personal credit cards, or by
borrowing funds from friends and family. If
you want to avoid these means of raising
capital, you may choose instead to go to a
bank. Lately, however, banks have been
exercising much tighter restrictions on lending.
In this environment, then, the loan application
– usually a standard form supplied by your
prospective lender – is something you simply
do not want to botch.
 A bank loan is a debt financing obligation,
issued by a bank or similar financial

How can we
institution. The obligation is to a company
that holds legal claim to the borrower's assets
above all other debt obligations. Because of

finance our this structure, the loan is considered senior to

all other claims against the borrower.

investment
Using Bank
Loans. Depending on the form of your entity,
you can take the loan from banks.
 In case of Sole Proprietorship.
▪ In case of In case of Sole Proprietorship, the investor can take a personal loan from the bank and
put this money in the investment.
▪ The bank in this case treats this investor as an individual coming to the bank to take a loan for his
own.
▪ In this case all the application form of the loan are with the name and information of the investor
himself, without mentioning anything about the business.
▪ All the requirements of this loan is from the person his own.
▪ In this case, the investor is responsible for the loan and this is a financial obligation concerning the
investor himself and not the investment.
▪ In case the investor Stumbled into a payment, the bank will take the legal steps toward the
investor himself not the investment.
▪ But you must take into consideration that, in case you open a checking account as a personal
account and the ban finds that the transactions make on that account is a commercial
transactions, they will block your account and restrict any transactions to be done on this account.
 Requirement For
personal Loans.
▪ The requirements for personal bank loans may
vary from bank to bank, but there are some
basic requirements:
1. Application Form.
2. Valid National ID.
3. Recent telephone, electricity or gas utility
bill (maximum three months)​​.
4. Proof of income (HR Letter OR 3 months
bank statements OR 3 recent salary slips).
5. Then the bank investigate the Credit Score
of the customer “I-SCORE”.
 Business Loans.
▪ A business loan is a loan specifically
intended for business purposes. As with
all loans, it involves the creation of a debt,
which will be repaid with added interest.
There are a number of different types of
business loans, including bank loans,
mezzanine financing, asset-based
financing, invoice financing, microloans,
business cash advances and cash flow
loans.
 Requirements of Business Loan.
▪ Also, Business Loan Vary from one bank to another. But the most common requirements:
1. Business and personal bank statements
2. Business and personal tax returns
3. Profit and loss statements and balance sheets
4. Collateral documents
5. Financial statement
6. Government-issued ID and business registration
7. Business plan and financial projections
 Business Plan.

▪ Business Plan: A written document describing the nature of the business, the sales
and marketing strategy, and the financial background, and containing a projected
profit and loss statement .
▪ A business plan is also a road map that provides directions so a business can plan its
future and helps it avoid bumps in the road. The time you spend making your business
plan thorough and accurate, and keeping it up-to-date, is an investment that pays big
dividends in the long term.
▪ Your business plan should conform to generally accepted guidelines regarding form and
content. Each section should include specific elements and address relevant questions that
the people who read your plan will most likely ask.
 Components of Business Plan.
1. Title Page and Content
▪ A business plan should be presented in a binder with a cover listing the name of
the business, the name(s) of the principal(s), address, phone number, e-mail and
website addresses, and the date. You don't have to spend a lot of money on a fancy
binder or cover. Your readers want a plan that looks professional, is easy to read
and is well-put-together.
▪ Include the same information on the title page. If you have a logo, you can use it,
too. A table of contents follows the executive summary or statement of purpose, so
that readers can quickly find the information or financial data they need.
 Components of Business Plan.
2. Executive Summary
▪ The executive summary, or statement of purpose, succinctly encapsulates your reason for writing the business
plan. It tells the reader what you want and why, right up front.
▪ The summary or statement should be no more than half a page in length and should touch on the following
key elements:
1. Business concept describes the business, its product, the market it serves and the business'
competitive advantage.
2. Financial features include financial highlights, such as sales and profits.
3. Financial requirements state how much capital is needed for startup or expansion, how it will be
used and what collateral is available.
4. Current business position furnishes relevant information about the company, its legal form of
operation, when it was founded, the principal owners and key personnel.
5. Major achievements points out anything noteworthy, such as patents, prototypes, important
contracts regarding product development, or results from test marketing that have been conducted.
 Components of Business Plan.
3. Company Description
▪ The business description usually begins with a short explanation of the industry. When
describing the industry, discuss what's going on now as well as the outlook for the future.
Do the necessary research so you can provide information on all the various markets
within the industry, including references to new products or developments that could
benefit or hinder your business. Base your observations on reliable data and be sure to
footnote and cite your sources of information when necessary. Remember that bankers and
investors want to know hard facts--they won't risk money on assumptions or conjecture.
 Components of Business Plan.
4. Description of the Product or Service
▪ The business description can be a few paragraphs to a few pages in length, depending on
the complexity of your plan. If your plan isn't too complicated, keep your business
description short, describing the industry in one paragraph, the product in another, and the
business and its success factors in two or three more paragraphs.
▪ When you describe your product or service, make sure your reader has a clear idea of what
you're talking about. Explain how people use your product or service and talk about what
makes your product or service different from others available in the market. Be specific
about what sets your business apart from those of your competitors.
 Components of Business Plan.
5. Market Analysis
▪ A thorough market analysis will help you define your prospects as well as help you
establish pricing, distribution, and promotional strategies that will allow your
company to be successful vis-à-vis your competition, both in the short and long term.
▪ Begin your market analysis by defining the market in terms of size, demographics,
structure, growth prospects, trends, and sales potential. Next, determine how often
your product or service will be purchased by your target market. Then figure out the
potential annual purchase. Then figure out what percentage of this annual sum you
either have or can attain. Keep in mind that no one gets 100 percent market share,
and that a something as small as 25 percent is considered a dominant share. Your
market share will be a benchmark that tells you how well you're doing in light of
your market-planning projections.
 Components of Business Plan.
6. Competitive Analysis
The purpose of the competitive analysis is to determine:
1. the strengths and weaknesses of the competitors within your market.
2. strategies that will provide you with a distinct advantage.
3. barriers that can be developed to prevent competition from entering your market.
4. any weaknesses that can be exploited in the product development cycle.
 Components of Business Plan.
7. Operations and Management
The operations and management component of your plan is designed to
describe how the business functions on a continuing basis. The operations plan
highlights the logistics of the organization, such as the responsibilities of the
management team, the tasks assigned to each division within the company, and
capital and expense requirements related to the operations of the business.
 Components of Business Plan.
8. Financial Components of Your Business Plan
After defining the product, market and operations, the next area to turn your attention
to are the three financial statements that form the backbone of your business plan: the
income statement, cash flow statement, and balance sheet.
 Components of Business Plan.
9. Supporting Documents
In this section, include any other documents that are of interest to your reader, such as your
resume; contracts with suppliers, customers, or clients, letters of reference, letters of intent,
copy of your lease and any other legal documents, tax returns for the previous three years,
and anything else relevant to your business plan.
 How to create your business plan
online.
1) WWW.Liveplan.com.
2) www. businessplantemplate.growthink.com.
 ▪ If you have an idea for a business and you want
some help so that your idea come to the bright.
▪ Small and medium-sized enterprises (SMEs) or
small and medium-sized businesses (SMBs) are
businesses whose personnel numbers fall below
certain limits. The abbreviation "SME" is used by
SMEs international organizations such as the World
Bank, the European Union, the United Nations and
Financing. the World Trade Organization (WTO).
▪ In Egypt there are 2.5 Millions SMEs.
▪ In Egypt Most of banks support SMEs and provide
facilities for those who apply for SMEs’ Initiatives.
 Bank considerations for SME
loan applications.
The 5Cs of bank lending
criteria.
▪ Banks look carefully at SME companies
before they lend money, especially in more
challenging funding environments like the
present one. The traditional approach for
assessing loan applications was based off five
primary factors – the “Five Cs”. These are:
1. Character.
2. Capital.
3. Capacity.
4. Collateral.
5. Conditions.
 Requirements of SMEs.
▪ In order to obtain the loan in Egypt, SME is requested to submit all statutory
documents of the company, last two years ’financial statements, sign the
loan agreement with the bank, and not provide any collaterals. The only
exclusion is that the loan is not granted to those working in import, it is
primarily targeted to support local producers and suppliers, purchase of
equipment and machinery needed for production, and stimulate job creation.
 How the Interest rate of Loans are
determined?
▪ Banks are generally free to determine the interest rate they will pay for
deposits and charge for loans, but they must take the competition into
account, as well as the market levels for numerous interest rates and Central
Bank policies.
▪ In Egypt, Central Bank influences interest rates by setting certain rates,
stipulating bank reserve requirements, and buying and selling “risk-free” (a
term used to indicate that these are among the safest in existence) Egyptian
Treasury and securities to affect the deposits that banks hold at the Central
Bank.
▪ This is Called “Monetary Policy” and is intended to influence economic
activity, as well as the health and safety of the overall banking system.
The Factors affecting the loan Pricing.
▪ There are three concerns affecting the loan pricing:
1. Cost of Fund.
2. Administrative Cost.
3. Credit Risk.
▪ The primary concern in loan pricing is the borrower’s credit risk.
 What are the advices for the investors
when selecting the optimal Source of
finance.
▪ For the investors who starts their own business:
▪ Try hard to decrease the level of Debt financing as much as possible.
▪ Try to focus on Personal Savings, Friends and Family and try to find
Angel Investor.
 What are the advices for the investors
when selecting the optimal Source of
finance.
▪ For the corporate entity:
▪ Try hard balance between equity financing and debt financing.
▪ D= Debt Financing.
▪ E= Equity Financing.
D

E
Important Site to compare between
Loans in different Banks.
In Egypt, Yalla compare.
www.Yallacompare.com