Financing the

Business
 Finance

You have to hang on to that

money like its gold. Look
after every pound because it
will allow you to get your
idea right and prove it.
Nobody will give you money
until you prove your idea is a
winner.Theres lots of Martyn Dawes
money out there but only for
 Financing the Business
All that Entrepreneur needs is Money
Lack of access to finance is cited as one of most
reported barrier to start or grow the business

In recent years, women entrepreneurs and minorities

complain about it
 Financing the Business
All that Entrepreneur needs is Money

How?
Control over business vs Provision of Funds

Flexibility and Security at minimum price

 Financing the Business
All that Entrepreneur needs is Money
Sources?

From Family, Relatives, Friends

(Internal Finance)

Does this mode requires any formal written

agreement (terms and conditions)
 Financing the Business
All that Entrepreneur needs is Money
External Sources?
Loans
Shares
Partnership
 Loans

Advantages Disadvantages
Term of loan is fixed Usually secured
not repayable on Can be refused
demand because of lack
Interest & capital of security
repayments fixed & Requires good
known in advance cash flow to
Rate of interest pay interest &
usually lower than repay capital
overdraft
 Bank Overdraft
Advantages Disadvantages
Flexible, once Repayable on
agreed available demand
on demand Usually secured
Cheap Can be refused
because of lack of
Good solution to security
short-term need Higher rate of
interest than loans
 The Bankers Anagram
Character
Ability
Management
Purpose
Amount
Repayment
Insurance
 Banking Relationships
Trust and respect
Personal relationship - regular contact
Regular information
- from firms: accounts. budgets, etc.
- from banks: new facilities, rate charges etc.
No surprises
- from firms: keep to agreed borrowing
- from banks: notification well in advance of changes in
borrowing arrangements
 What Worries Bank Managers
Frequent excesses on the account
Losses
Lack of financial information
Developing hard-core borrowing
Diminishing or rapidly increasing turnover
Declining margins
Inability to meet forecasts
Over-reliance on too few customers or suppliers
Unavailable directors
Poor credit control
Sources Of Finance
Equity Capital
(public and government buy shares of a business)
Debt Financing
(loans secured from banks, public and government)
Retained Earnings
(profit re-invested in business)
 Equity
Long-term investment, placed at risk
Your own money
The money of family and friends
Business Angels investments 10K - 250K
Venture Capitalists mainly investments over 2 million
Stock Markets mainly used as later stage investment or as an exit route
 Equity
Dilutes ownership

Dividends may be expected

Outsiders may want to interfere

Business angels require growth prospects

Venture capitalists require significant growth

Both investors will want an exit route in future

Both will take a significant proportion of profits

Both will require detail information

FINANCING IN PAKISTAN
Access to Finance

Initial Expansion/Overhauling
Investment Investment
Access To Finance
Commercial banks apply conservative policies while lending to
SMEs.

More importantly, the exiting structure of financial sector was

developed to serve medium to large enterprises that are organized as
formal businesses.

Most banks consider lending to SMEs an unattractive venture due to

a range of objective and subjective factors including ;

high transaction costs

SMEs' inability to comply with tangible collateral requirement
no linkage of financial products with SME sector needs, etc.
 Access To Finance

The SME sector is not homogeneous, therefore, the attractiveness of an

enterprise to financial institutions varies with SME size, structure of
organization, maturity, industrial sector, etc.

Within the Investment Climate Survey, it was observed that 57 per cent
of new investment for Small and Medium Enterprises and 67 per cent
of working capital finance comes from internal finance or retained
earnings;
only about 7 per cent of funds for investment or working capital come
from banks or other financial institutions.
MICRO-FINANCING

NON GOVERNMENTAL ORGANIZATIONS

1. Akhuwat
2. Asasah (Registered under The
Companies Ordinance, 1984 ( Non-Profit
Company; Section 42)
3. Kashf Foundation (Registered under The
Societies Registration Act, 1860)
Examples of Other MFI
4. Taraqee Foundation (Registered under