FINANCING YOUR BUSINESS IDEA

DANIEL ASIEDU MD/CEO ZENITH BANK

INTRODUCTION
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

IDEA TO BUSINESS PROCESS

Generation of Business Idea
Maintain Proper Records

Determine Your Suitability for the Business

Manage and Grow the Business

Carry out a Feasibility Study

Commence the Business

Seek Guidance from Others

Seek Appropriate Financing

FACTS ABOUT NEW BUSINESSES

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 BUSINESS (Cont)

The US Bureau of Census reports that 25 percent of businesses 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

FINANCIERS PERSPECTIVE From the financiers perspective, the high failure rate of new businesses suggests that very few ideas result in successful business ventures
This implies that a thorough evaluation of the potential of the idea is needed before it can be financed

FINANCIERS PERSPECTIVE (Cont)

The more convincing the feasibility study is, the more likely it is for the business to succeed, and the more likely a financier will take a serious look at it Broadly, the feasibility study should address the following viability indicators:
o Market Viability o Technical Viability o Business Viability o Management o Economic and Financial Viability

FINANCIERS PERSPECTIVE (Cont) A financier will take a serious look only after you have ascertained that the idea passes all the above It is at this stage that appropriate funding can be sought. Financiers will view all proposals purely from the business perspective We now discuss alternative forms of finance

FORMS AND SOURCES OF FINANCE

There are broadly two forms of finance i.e. Equity capital and Debt capital Equity is capital that is not ordinarily repaid to investors in the normal course of the business. It represents risk capital and is typically raised from promoters of the business

Debt capital, on the other hand, is capital that a business acquires by taking out a loan or some other form of financing which must be repaid at some specific future date

EQUITY Equity sources include: Owners Equity Business Angels Venture Capital Companies Private Equity Government-backed Grants Donor Agencies Stock Exchange

EQUITY (Contd)
Owners Equity: is the funding that entrepreneurs invest into their business to finance operations. It comes from personal savings or contributions from family members, friends, etc Business Angels: Wealthy individuals, entrepreneurs or businessmen who provide funding for a business at start up, usually for an ownership stake

EQUITY (Contd)
Venture Capital Companies: Investment companies who provide capital for businesses with profit potential and exit after a period
They typically finance viable young companies/ideas, require less leverage and invest the equity funding into working capital to grow the business. Examples are Activity VCF, Bedrock VCF, Fidelity Fund II, Gold VCF and Ebankese VCF

Private Equity (PE): funds which invest in relatively mature and viable businesses. They typically buy shares from current owners with the equity funding and require more leverage to grow the business. Examples include ICS PE Fund and Oreos

EQUITY (Contd)
Government-Backed Grants: These are facilities granted by government for business start-ups and expansions. Investments are usually targeted at strategic industries Donor Agencies: Strategic funds for investing in certain selected industries. Each fund has its peculiar requirements. Examples include IFC and AFD

Stock Exchange: Financial market for shares and bonds usually used by expanding, growing and matured businesses

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

DEBT (Contd)
Loans from Family, Friends, Partners etc: Debt provided to the owner usually to support start up, operational and expansion costs
Government-Backed Grants: These are facilities granted by government for business start-ups and expansions. Investments are usually targeted at strategic industries. An example is the Japanese Grant with the Ministry of Finance

DEBT (Contd)
Term Loans and Overdrafts: Facilities granted by financial institutions to businesses as working and investment capital
Project Financing: involves non-recourse financing of a development and construction of a particular project. Normally used in financing huge projects

DEBT (Contd)

Trade Financing: Includes Letters of Credit, Bills for Collection, Bankers Acceptance, Export Financing, etc used to finance trade transactions Asset Financing i.e. Leasing, Hire Purchase: a form of lending used to finance the acquisition of fixed assets

DEBT (Contd)
Guarantees: A mix of Performance Guarantees, Advance Payment Guarantees, Retention Guarantees, etc provided by banks to facilitate contractual and financial arrangements Factoring: a non-recourse form of debt employed in financing receivables so as to release working capital for the business
Invoice Discounting: debt employed in financing receivables to be repaid on collection from customers.

DEBT (Contd)
Buyers Credit: A financial arrangement in which a financial institution in the exporting country extends a loan directly or indirectly to a foreign buyer to finance the purchase of goods and services from the exporting country

Suppliers Credit: A financing arrangement under which an exporter extends credit to the buyer in the importing country to finance the buyers purchases.

STAGE USAGE OF FINANCE

The best practice in finance is that the form of capital which is invested in a business depends critically on the firms peculiar features. Mainly, its stage in the business life cycle. In general,

Start-ups are best financed with equity (either owners equity, private equity or venture capital)

STAGE USAGE OF FINANCE

Expanding/Growing companies are financed by Private 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 debt and equity

DIFFICULTY IN ACCESSING FINANCE

START-UP BUSINESS
EXPANDING/ GROWING BUSINESS Extremely Difficult

Less Difficult

MATURE BUSINESS

Not Difficult

TIPS
Not every business idea will require external funding

It is always more difficult to receive external funding for start-ups

The level of a financiers interest is positively correlated with the level of the promoters financial commitment

Financiers prefer projects with shorter repayment periods

TIPS (Cont)
You are more likely to receive external funding for projects with smaller start-up costs Where possible, the project/idea should be phased if the total funding requirement is huge

Financiers will view every business idea from a purely business perspective

THANK YOU

www.zenithbank.com.gh
in your best interest