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FINANCING THE VENTURE

“ never put your money into business unless you have to.”
Capital Requirements
Capital comes in monetary terms and in three forms as follows;

FIXED CAPITAL

WORKING CAPITAL

GROWTH CAPITAL
FIXED CAPITAL
Fixed capital refers to;
- Money needed to purchased fixed assets or capital goods.
- acquisition of machinery, buildings, office equipment and all
those fixed assets or items needed in the provisions of services to the
customer.
WORKING CAPITAL
- is needed to fund day-to-day operations.
- refers to money(hard cash) to support its normal short term
operations.
- Generally used for inventory, payroll, utilities and stock as well to keep
business an on going concern.
GROWTH CAPITAL
- is not related to daily or seasonal requirements for funds of the
business.
- Needed when an existing business needed to expand, diversify, or
change it’s direction.
- This fund is mainly used for company’s growth.
Sources of Capital
• In broad terms funds needed for the business can be generated either
externally or internally.
Internal fund sources generally refers to the funds which are
owned by the entrepreneurs itself, whereas external capital essentially
refers to those beyond the entrepreneur and the company.

Other than sourcing internally or externally , capital may be sourced


from formal and informal source.
The Formal and Informal Sources
Formal sources
means sourcing or borrowing funds from organizations or
institution duly authorized by the government or by the law to extend
financial assistance or other forms of support service to the industry.
Includes bank ( private and government), investment houses,
lending companies/investors, mortgage bank, pawnshops, credit card
companies.
INFORMAL SOURCES
Include those fund sources other than formal sources mandated
by law to provide capital or financing the business organizations. This
group includes the entrepreneur’s relatives, suppliers and other fund
source outside the financial system.
Owner’s Equity
In corporation, the contribution of the owner to the capital of the
business is called equity and is evidenced by the issuance of stockholder’s
certificate issued by the corporation.
Oftentimes referred to as ownership of the corporation and the
holders of the certificate are called stockholders.
Types of stocks/equity or stockholder
Common Stock
have the right to vote and controlling power
Preferred Stock
does not possesses the voting rights similarly to common stock
however preferred stockholders are guaranteed a fixed return on the
investments regardless of the operational outcome of the business
Long – Term Borrowings
Long – term borrowings referred when borrowed money is paid 1 or
more than years. These fund sources take the form of the following:
MORTAGE
A mortgage takes the form of fund generation by way of pledging a
designated property as security or collateral for the loan. Example is a
pawnshop (in case of smaller amount.

BONDS
A bond, also known as a fixed income security, is a debt instrument created
for the purpose of raising capital. They are essentially loan agreements
between the bond issuer and an investor, in which the bond issuer is obligated
to pay a specified amount of money at specified future dates.
Long Term Commercial Paper( LCP)
are commercial documents issued by large companies with
credible track. Like bonds LCP carries a fixed return promised by the
issuer.
Short Term -Creditors
Short term creditors take the form of financiers on short term
basis lasting to one year or less
- Do not bulk documents to be approved
- No need for the business plan/feasibility study to be presented to be
approved
- can serve as stand-by credit facility to entrepreneur
- Can borrow money or goods by simple using phone
- Brief visit to offices to sign papers
Follow are the providers of short term credits
Commercial Bank
commercial banks are duly bound to provide both short term
and long term credits.
Merchandise suppliers.
The company’s inventory or stock can be procured either
through cash or credit terms. Entrepreneurs who procured their
inventory on credit terms are not only daring but also smart
entrepreneurs. Hard cash intended to buy/procure inventory van be
used for other purposes if inventory is procured on credit basis.
CREDIT CARD COMPANIES
Credit card is the most convenient yet the most expensive loan
terms you can find.
CAPITAL EQUIPMENT SUPPLIERS
LEASING COMPANIES
RECIEVABLE FACTORS
DEFERRAL FACTORS
Seat work
1. Differentiate formal to informal sources
2. Why collateral is needed/ required in bank financing
3. List 5 examples of formal and informal sources of funds