small business financing
TRANSCRIPT
PH BuchPH Buch
1
EDIInternational Training Programme on Women Empowerment through
Entrepreneurship Development
Small Business Management – Financing an Enterprise : Challenges & Strategies
ByBy
PADMIN BUCHPADMIN BUCH
March 03, 2015March 03, 2015
For academic discussions onlyData / information are on indicative basis
PH BuchPH Buch
For academic discussions onlyData / information are on
indicative basis
PH BuchPH Buch
3
PH BuchPH Buch
4
PH BuchPH Buch
5
PH BuchPH Buch
6
PH BuchPH Buch
Entrepreneurship
Backbone of economy world over
More so to our economy Provides great employment
opportunities Challenges of resource
mobilization, market and technology
PH BuchPH Buch
8
PH BuchPH Buch
Resource Mobilisation :
Industry in general & Small Business in particular . . .
PH BuchPH Buch
Resources
FinanceTechnologyManpowerInfrastructure
PH BuchPH Buch
Small Business ManagementSmall Business ManagementAdvantagesAdvantages
Flexibility as well as low start-up and operating costs have enabled SMEs to spring up, to reposition and adjust themselves quickly in response to
market and economic changes. Moreover, they easily expand or contract in a
short time.
11
PH BuchPH Buch
Small Business Management : Small Business Management : ProblemsProblems
The most common problems for SMEs are the lack of access to market
information and technology, the low quality of human
resources and Dealing with Global Trade Financethe lack of access to capital
12
PH BuchPH Buch
13
PH BuchPH Buch
Small Business Management
Challenge of dealing in Global Trade Finance
For academic discussions onlyData / information are on indicative basis
PH BuchPH Buch
15
Global Trade FinanceGlobal Trade Finance
Difference between domestic and international finance
Key componentsForeign Exchange TransactionsGuiding & Regulatory FrameworkInstitutions
Significance
PH BuchPH Buch
16
Global Finance : CurrenciesGlobal Finance : Currencies
Currencies are country specific
Currencies are neither equivalent in value nor stable
Managing Currencies : key Component of Global Trade
Rate of Currency exchange : Exchange Rate
PH BuchPH Buch
17
Foreign Exchange TradingForeign Exchange Trading
Sale or Purchase of one currency with another
Transaction is always discussed from the point of view of Banks
FE quotation by a bank has two rates
Willing to buy
Willing to sell
Principle is to buy low & sell high
Exporter-Bank : purchase transaction for bank
Importer-Bank : sell transaction for bank
PH BuchPH Buch
18
Types of Exchange RatesTypes of Exchange Rates
Ready of Cash
Tom
Spot
Forward
PH BuchPH Buch
19
Types of Exchange RatesTypes of Exchange Rates
Ready for Cash : Transactions to be settled on the same day
Tom : Delivery of Foreign currency is to be done on the next working day of transaction
Spot : Delivery of Foreign currency is to be done on the second working day of transaction
Forward : Delivery of Foreign currency is to take place on the date later than the spot date
PH BuchPH Buch
20
Types of Exchange RateTypes of Exchange Rate
Cover Rate : The rate at which the banks can cover the merchant transactions in the inter-bank market without any profit or loss
Fixed & Floating Exchange rate Merchant Rates : Time of receiving FE
TT Buying & Selling rate : Immediate Transaction
Bills buying rate & selling rate : documents
PH BuchPH Buch
21
Global Trade Finance :Global Trade Finance : Some relevant terms :Some relevant terms : Correspondent BankingCorrespondent Banking
Nostro accountVostro accountEscrow account
PH BuchPH Buch
22
Foreign currency accountsForeign currency accounts Some relevant terms :Some relevant terms :
Correspondent BankingCorrespondent Banking
Nostro account : “Our account with you”
A foreign currency account maintained by a bank in own country with a bank abroad
Vostro account : “Your account with us”
A foreign bank’s account with a bank in Home country
PH BuchPH Buch
23
Foreign currency accountsForeign currency accounts : :Correspondent BankingCorrespondent Banking
Escrow account :Maintained exclusively for
business purposeAs also merchant trading
activityBy citizens outside the country In the parent countryWith permission of National
Bank
PH BuchPH Buch
24
Finance for Global Trade :Finance for Global Trade :
Letter of CreditLetter of Credit
For short term transactions of goods & services
L/c is an undertaking by a Bank / FI
To make payment to a named beneficiary
Within Specified Time
Against Submission of documents
PH BuchPH Buch
25
Latter of CreditLatter of Credit
L/C is opened by an importer (applicant)
To ensure that the documentation
satisfies the conditions of the sales
contract
For the exporter, L/C is the most secured
method of payment
Provides security in the international
trade
Entails cost & may be weighed.
PH BuchPH Buch
26
Letter of CreditLetter of Credit
Issuing Bank
Advising / Confirming Bank
Underlying Contract
Importer (Applicant)
Exporter (Beneficiary)
PH BuchPH Buch
27
Letter of Credit :Letter of Credit :
Uniform Customs & Practice for Uniform Customs & Practice for Documentary Credits Documentary Credits (UCPDC)(UCPDC)
Most L/c are subject to UCP 600
Which is the universally recognized set of rules governing L/C in the international trade
Formulated by ICC
PH BuchPH Buch
Small Business Management : Small Business Management :
Funding ChallengesFunding Challenges
Despite efforts by financial institutions and public-sector bodies to close funding gaps, SMEs continue to experience difficulty in obtaining risk capital.
These funding gaps relate to firm size, risk, knowledge, and flexibility.
SME borrowing requirements are small and frequently do not appeal to financial institutions.
28
PH BuchPH Buch
Small Business Management : Small Business Management :
Funding ChallengesFunding Challenges
More collateral may be required than SMEs can pledge.
Financial institutions may lack expertise in understanding small and medium knowledge-based business.
The flexibility in terms and conditions of financing that SMEs require may not be available.
29
PH BuchPH Buch
Project Finance. . .
Unlike large units …
Which can also raise finance from Capital market or Foreign sources
SMEs are dependent on Banks / other sources
PH BuchPH Buch
Sources for Finance . . .
Conventional : Bank / State Financial Corporation
Non-conventional : Venture / Angel funds
Country specific Govt. Schemes
Industry / Technology specific schemes
PH BuchPH Buch
Sources of Project Finance (Contd…)
Specific Sources
Venture Finance Angel fundingPrivate Equity (PE)Early Start up funding
PH BuchPH Buch
Venture Finance
A type of private equity capital is provided as seed funding to early-stage, higher risk as also higher growth potential companies
Stages of venture capital financing The seed stage The Start-up stage The Second stage The Third stage The Bridge / Pre-public stage
PH BuchPH Buch
Venture financeVenture finance
In the United States, venture capital accounts for only a small part of SME financing (under 2%) concentrated in certain industries.
To respond to issues raised by investors, venture capital funds typically demand board representation and play an active management role, which may not be acceptable to some (family-owned) firms
34
PH BuchPH Buch
Venture financeVenture finance
There has been rapid growth in venture capital and private equity in Asia since the Asian financial crisis.
Venture capital and private equity are concentrated in Japan and Korea.
Hong Kong and Singapore are also centres of the regional venture capital activities.
Venture capital in Chinese Taipei is concentrated in hightech investments and started from fund managers with experience in the U.S. venture capital industry
35
PH BuchPH Buch
Angel funding
An angel Investor or angel is an affluent individual who provides capital for a business start up
This usually is in exchange for convertible debt or ownership equity
A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies
PH BuchPH Buch
Angel funding
Unlike venture capitalists and bankers, many angels are not motivated solely by profit
Angel investors are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday.
Two kinds Affiliated & nonaffiliated.
An affiliated angel is someone who has some sort of contact with you or your business but is not necessarily related to or acquainted with you.
A nonaffiliated angel has no connection with either you or your business
PH BuchPH Buch
Specific Sources of Finance
Increasing preference for such sources particularly by technology oriented projects / start ups
These essentially are equity based funding sourcesNo interest burden in initial yearsSuch funding sources also have
insight / expertise in areas such as finance, marketing, business modeling, etc.
PH BuchPH Buch
Small Business Management : Financing an EnterpriseSmall Business Management : Financing an Enterprise
Traditional Sources of Finance
Banks
39
PH BuchPH Buch
BanksBanks
Traditional industries with tangible assets and well-run businesses can often raise funds from traditional sources like banks
Analysis of SME financing in the U.S. suggests that banks and traditional credit-granting institutions still provide the main base
40
PH BuchPH Buch
BanksBanks
However, for some banks financing SMEs may be very difficult due to lack of accurate reliable information on the
financial condition and performance; unconvincing and weak business plans; weakness in SMEs management, market links, governance and information technology.
41
PH BuchPH Buch
BanksBanks
There can be a lack of training for banks’ staff, who might not be sufficiently informed about lending to growing, high-risk companies.
Banks’ weaknesses in identifying the characteristics of SMEs often lead to unsatisfactory lending arrangements.
The banks often resist due to the higher overhead cost resulting from a high number of customers with smaller loan size.
42
PH BuchPH Buch
BanksBanks
The banks must adopt appropriate lending technologies and operation systems to enable them to realize the market potential and to lend profitably to small businesses.
43
PH BuchPH Buch
:
A Case Study
44
A case studyBank Rakyat , Indonesia
PH BuchPH Buch
In Indonesia, the government implemented policy to encourage banks to have at least 20% of its portfolio in SMEs.
The Bank Rakyat Indonesia (BRI) has developed its own approach to the provision of financial assistance to SMEs.
The bank developed uniquely tailored lending programs. Administrative procedures and collateral systems were simplified.
45
PH BuchPH Buch
Bank Rakyat IndonesiaBank Rakyat Indonesia
Technical assistance was provided through SME Centers.
Loan guarantee were provided and micro credit insurance.
BRI established SME Centres to provide growing businesses access to information technology with which to access a global market information system.
46
PH BuchPH Buch
Bank Rakyat Indonesia : Bank Rakyat Indonesia : a case studya case study
BRI concluded that the development of SMEs is not only a bank responsibility but requires commitment from
financial institutions, large-scale companies,
47
PH BuchPH Buch
Bank Rakyat Indonesia : Bank Rakyat Indonesia : a case studya case study
central and regional governments and
other such as the Chambers of Commerce, and NGOs.
The government needs to develop an integrated and comprehensive policy in order to achieve this goal
PH BuchPH Buch
Policy RecommendationsPolicy Recommendations
Promote a flexible environment for the venture capital specific to SMEs to flourish;
Tailor credit in banks and other similar institutions to the need of small firms;
Give a greater emphasis on training programs to help banks’ staff understand the unique requirements of SMEs better
49
PH BuchPH Buch
RecommendationsRecommendations
Harmonization of the financial policy framework across economies will promote cross-border strategic alliances including SMEs and facilitate transfer of experiences between the regional economies
50
PH BuchPH Buch
5151
Sources of Finance : International
PH BuchPH Buch
Project Finance : International
International Finance Corporation (World Bank Group)
Asian Development Bank (ADB) International Venture Funds Private Sector Banks / Financial
Institutions Schemes by Government of
respective Countries International Project Finance
Association ( IPFA), UK
PH BuchPH Buch
Finance for Small Business Units
Entrepreneurs should have credible business plan
Also convincing approach during discussions with such sources of funding
PH BuchPH Buch
5454
Finance for Small Business Units
Identification & Selection of Project
Feasibility Report
Project Appraisal
Project Finance Tie up
PH BuchPH Buch
5555
Phases of Project Business CyclePhases of Project Business Cycle
Pre-investmentPre-investment Investment Investment Operating Phase Operating Phase
Identification Identification Negotiation/ Negotiation/ Commissioning Commissioning (Opportunity Study) (Opportunity Study) Constraint Constraint Start-up Start-up
Pre-selection Pre-selection Engg. Design Engg. Design Replacement Replacement (Pre-feasibility Study) (Pre-feasibility Study) Rehabilitations Rehabilitations
Feasibility Report Feasibility Report Construction Construction innovation innovation
Pre-prodn. Pre-prodn. marketing marketing
Appraisal Appraisal (Appraisal Report) (Appraisal Report)
Project Finance
PH BuchPH Buch
5656
The pre-investment phase is the most important because the success or failure of a project depends on its findings and interpretation
PH BuchPH Buch
Feasibility Assessment
I. IntroductionII. Promoters Background & Past
PerformanceIII. Market AssessmentIV. Technical Feasibility AnalysisV. Cost of Project & Means of FinanceVI. Financial Viability AnalysisVII. Key Elements & Concluding Observations
PH BuchPH Buch
Market Feasibility
For academic discussions onlyData / information are on indicative basis
PH BuchPH Buch
Market Feasibility
FOCUS
Focuses on market demand
Highlights gap : between demand and supply
Gap could be positive or negative
Collection & Analysis of information / data
PH BuchPH Buch
60
Information Gathering Methods
Secondary Source Research
Primary Data Collection
Test Marketing
PH BuchPH Buch
61
Market Survey :
Questionnaire
Open Ended questions
Close Ended questions
Multiple choice questions
Ranking questions
PH BuchPH Buch
Questionnaire Design : Some Tips
Keep it brief Proper Sequence Do not leave things to investigators
discretion (e.g. Units) Avoid Country specific Sensitive
questions Language- more than one if so
required Open Ended Questions at the end
PH BuchPH Buch
Market research :Uncertainties…
Information/Data are subjective
Authenticity of sources of information
Un-realistic assumptions
Lack of appreciation of macro-economic & international factors
PH BuchPH Buch
Technical Feasibility
PH BuchPH Buch
TECHNICAL FEASIBILITY
Is it feasible to Manufacture/ Execute
The Product(s) The Service
PH BuchPH Buch
Technical Analysis
Machineries / Equipments
Raw Materials Technology options Infrastructure and Utilities Manpower Compliance to Statutory &
Industry Specific Norms
PH BuchPH Buch
Technology
Appropriate Proven Updated Cost-
effective
PH BuchPH Buch
Financial Viability
Cost of Project
Means of Finance
Financial Returns
For academic discussions onlyData / information are on indicative basis
PH BuchPH Buch
69
Cost of Project :
Main components
i. Land & its developmentii. Buildingiii. Plant and Machineriesiv. Technologyv. Other Assets
vi. P&P Expensesvii. Contingenciesviii. Working Capital Margin
Capital Investment
PH BuchPH Buch
70
Preliminary & Pre-operative Expenses
Legal, Financial & other Consultancy Fees
Traveling & Conveyance Salary drawn during
construction period Interest on Term Loan during
construction period Other Miscellaneous Expenses
PH BuchPH Buch
71
Cost of Project
Working Capital Margin
Working Capital includes : Raw material stock, Work in
Process, Finished Goods Storage, Receivables, Some Admn. Expenses..
Bank Loan may be to the extent of 70%
The balance is to be brought by promoters
This is WC Margin
PH BuchPH Buch
Sources of Finance
Debt
Equity
PH BuchPH Buch
Modes of Finance
Term Loan
Own Funds / Promoter's
Contribution
Incentive / Subsidy
IPO
Public Private Partnership
(PPP)
PH BuchPH Buch
Project Finance
Term Loan available on Fixed Assets
Quantum of Term Loan vary
Term loan on P& P as well as
Contingency also may be available
Term loan on Miscellaneous Fixed
Assets not sure
Ratio of Term Loan & Own Funds
important
PH BuchPH Buch
75
Finance for Small Business Units
PH BuchPH Buch
76
Financial Returns Analysis
Projected profitability statement Cash-cum-Fund Flow statement Projected Balance sheet
Break-even point Ratios Sensitivity Analysis
Relating to the kind of industry/project
PH BuchPH Buch
Finance for Small Business Units
In a market driven economy authentic and properly documented data . . .
. . . facilitates the decision making by the lenders
PH BuchPH Buch
THANK YOU
Padmin Buch . . .
For academic discussions onlyData / information are on indicative basis