University of Tourism and Management Facultuty of Internacional Marketing Management

Financing the start up

-Research paper-

Subject: English 1

Lecturer: Katerina Vidova MA

Made by: Mihajlovski Daniel, index:40077

Skopje, 2010

Contents

Introduction:
A Start-Up's Financing Strategy..3.

Main Part:
What About Other Sources of Capital?........................................................................5. What Is The Right Stock Price?....................................................................................5. How Do We Chart The Ideal Financing Course?.........................................................7. 1. How to Target and Land Financing for Your Start-Up7. 2. Step 1. Evaluate your business concept and organization as an opportunity: its strengths and limits will help define your potential capital sources.8 3. Step 2. Determine how much money you will need soon (and later)?.........................8 4. Step 3. Realize the likely type(s) and level of financing your start-up will attract..9 5. Step 4. Complete the management team. Executive Summary...10 6. Step 5. Prepare for fundraising: refine the business idea; write the Business Plan 10 7. Step 6. Evaluate & confirm the legal issues.11 8. Step 7. Make contacts; find lead investor(s).12 9. Step 8. Begin due diligence..12 10. Step 9. Close financing -- in stages if needed..12 11. Step 10. Follow the Business Plan, as it continually changes..13 12. Some Franchisors Offer Their Own Financing Programs13 13. How to Choose the Right Financing Option to Meet Your Goals14

Conslusion.15 Bibliography..18

Introduction
Why Raise Outside Capital? Most new businesses are built without raising substantial amounts of outside capital. They are founded with small infusions of cash from the founders, perhaps augmented by support from relatives or wealthy individuals. In doing so, the founders avoid the effort and dilution of raising capital from institutional investors. The vast majority of small businesses remain small, and their founders are happy maintaining family control and pursuing modest growth In high-technology, however, two factors confound this common pattern: 1) founders tend to be very ambitious about growth and liquidity, and 2) the rapid pace of technological progress makes slow growth unsustainable. Because some technology companies use capital as a competitive weapon to progress more rapidly, all their competitors are compelled to do so as well. Recognizing the necessity to develop and grow rapidly, and the resulting need to raise large amounts of outside capital, technology entrepreneurs are faced with a range of options, each appropriate to a different stage of growth. Early in the company's development wealthy individuals and founders can provide the relatively modest amounts of capital (less than $1 million) to get the business plan written, the core management team assembled, and a prototype developed. At that point, the CEO turns to professional venture investors for larger amounts of capital ($5 million to $20 million), and for the expertise essential to building a company. Finally, the successful start-up turns to major corporations or the public markets for access to even larger blocks of capital (beyond $20 million) and for liquidity for the founders, investors, and employees. How Much Capital Should You Raise? Since a company grows in value as it progresses, the founders can minimize their dilution by raising only as much money as necessary at each stage of growth. Ideally, you would raise money just as you need it, but that would require constant fundraising and preoccupy management with selling stock as opposed to building and selling product. Because investors tie

the growth in the value of the business to the achievement of demonstrable milestones, increases in valuation can only be realized in a stepwise fashion. So the answer to the question, "How much capital should we raise?", becomes apparent. You should raise as much capital as is necessary to get to the next major milestone that will justify a substantive increase in the company's stock price. When it comes to cash, the cost of under funding vastly exceeds the cost of overfunding. It is therefore prudent to add a fudge factor to the estimate of how much capital is required to get to the next milestone - 50% is customary. What milestones justify successively higher prices? Typically they are the completion of a prototype, completion of the management team, conclusion of beta testing for a product, building a list of initial referenceable customers, getting customers to place repeat orders, reaching cash flow break-even and profitability, filling out a fuller product line, and completing a series of profitable, growing quarters on plan. Prudent CEOs raise more capital than they think they'll need and rarely turn away capital in an oversubscribed round. There are two reasons why taking too little cash and running out is so costly. First, it puts the company in a very weak position when negotiating price with a new investor. More importantly, it reveals a lack of ability to forecast the future and therefore undermines new investors' confidence in management's plans. Most venture capitalists believe with good reason that there is an inverse correlation between bridge loans and a company's ultimate success If it is available, Take The Money!

Main Part
What Is The Right Stock Price? Once a venture firm invests in your company and joins your board, they will want to be on the same side of the table with you forever. Negotiating the price of a follow-on round for a company where you serve on the board would be awkward at best, and could fracture the trust that is critical to maintaining an effective board. So with each subsequent round of investment, a new outside investor is asked to negotiate the price, at arms length, with the management team. Existing investors are then asked to participate in the round as an expression of confidence in the company's progress. While an inside investor can be used to signal pricing to a new investor, ethics demands that the insiders work strenuously on behalf of management to get an attractive price for the stock. It is in fact a mathematical reality that an existing investor who participates pro rata in a followon round is indifferent to price. His ownership will be roughly the same over a range of valuations. At a low price his early investment gets diluted more, but his follow-on round buys more. At a high price, the opposite is true. The two effects roughly cancel one another. The argument for refusing to accept too low a price is self-evident, but there is an equally compelling argument not to push too aggressively for a high price. Too high a stock price too early can have several negative effects. Investors in subsequent rounds need to feel they got a fair shake, particularly as their support will be necessary when the company hits the disappointments that inevitably come along the way. Even more importantly, employees need to see smooth, progressive stock price growth over time to feel that their efforts are well spent. Too high a valuation early on, and a consequent down or flat round later on causes employees to question why, if they're working so hard, "value" isn't being created. Employee disillusionment and defection is common when stock prices don't grow in a consistent fashion. What About Other Sources of Capital? Venture capital tends to be expensive capital. It is expensive because it generally brings with it free consulting, an enormous network of relevant contacts, access to additional capital, and early validation of success. There is nothing wrong with augmenting venture dollars with

less expensive capital, as long as it's done at the right time and under the right conditions. Startups today enjoy access to several additional types of financing. Bank debt. Warren Buffet once said that taking on debt is like driving with a spike sticking out of your steering wheel ... no problem until you hit a bump in the road. In fact, substantial bank debt has no place on the balance sheet of an early stage company, and most bankers will tell you so. In a good year, banks make 15% on their money. They can ill afford even one portfolio loss and tend to get jittery when inevitable "start-up hiccups" occur. Their jitters can often make things worse. However, developing an early banking relationship with a modest line is not a bad idea as long as a few rules are followed: 1) deal only with banks that have a long and consistent history of high-tech lending, 2) deal only with banks that have established long-term symbiotic relationships with your venture capitalists, 3) don't borrow more than two weeks worth of revenue until you're solidly profitable, and 4) over-communicate with your loan officer. This way you'll have a banking relationship with someone who has a long-term business interest in your success, just like your venture investors. Venture Leasing. This has become an increasingly popular vehicle for leveraging an initial venture investment. Many of these firms can provide a flexible array of services that allow you to devote your more expensive capital to people rather than PCs and cubicles. Venture capitalists also like this vehicle because it helps improve their return on investment as well. Price is by no means the most important factor in choosing a venture lessor. Ask for reference CEOs of difficult accounts to learn how the lessor reacts in tough times. Talk with other portfolio CFOs to find out how flexible the firm is in accommodating special service needs. And again, rely on your venture board members to advise you concerning who has built a sustained reputation for patience in the start-up community. Corporate Partners. Corporate investors represent a double-edged sword to small companies. They can bring great resources to bear. They can also impose ponderous decision-making processes on fragile start-up companies. Venture capitalists only have one agenda in their investing, the maximization of stock value. That happens to be the same agenda as the company's founders. Corporate investors usually have a more complex and less compatible agenda in mind. The people making initial investment frequently change jobs and the relationship with the company can fall hostage to corporate politics. Finally, a corporation focuses primarily on their own success. If that company's core business takes a sudden downturn, the relationship can suffer through no failure of performance on the part of the startup. In our view, business relationships with large corporations (such as marketing or technology

agreements) should stand on their own feet without the complication of an equity investment. The higher share price a corporate investor may pay frequently comes with hidden costs that more than offset the lower dilution. These investments make far more sense as the start-up matures into robust profitability. Revenues. The least dilutive way to finance a company is with profits. Before raising capital, make sure you've done everything reasonable to control costs and increase revenues. If your income statement can't provide any more help, take a look at the balance sheet. There is hidden cash in old receivables - and if they're old because of unhappy customers, the company will need to resolve those problems before prospective investors begin their calls How Do We Chart The Ideal Financing Course? Financing start-ups is a craft, not a science. The company's performance, macroeconomic fluctuations, capital market fads, and serendipity each play a role in determining what the best course of action is at any time in a young company's growth. There are many right answers, and there is never a time to rest. The best CEOs are always selling their companies, always raising money. Financing a company, like starting a company, is an exercise in predicting the future. Consult your management team, consult your board, consult your attorney, consult your spouse, and finally consult your Ouija Board. But don't run out of cash.

How to Target and Land Financing for Your Start-Up The Decathlon Metaphor 1995 TEN article by George C. Levy, Ph.D., 313-930-6964, Infomatrix Inc., a hi-tech consulting firm in Ann Arbor, MI, and Thomas S. Vaughn, J.D., 313-568-6800, Dykema Gossett PLLC, a business and securities law firm in Detroit, MI. The process of obtaining money to fund a new idea or start-up company, can be frustrating and sometimes fatal for the new enterprise. Often the entrepreneur chases prospective financing that is not appropriate for his or her business opportunity. While this can succeed occasionally, the effort can sidetrack corporate management just when they are most needed to prove the business concept, complete R & D, prepare for initial sales, etc. In this article, we will discuss some of the factors that can help you to succeed in fundraising while continuing to develop your business concept. Financing your start-up can be likened to competing in a decathlon: there are many events, and you need to excel in several -- but to

successfully compete, it is important that you do a credible job in all of the components of the competition. Many of the points raised here require a realistic assessment of your ideas and the competitive situation you are likely to face in several years when your product is out there in the marketplace. Unfortunately, most entrepreneurs are not able to stand back and evaluate their plans with a realistic view of market factors and potential threats to their plan, both through technology development (yours and theirs) and other unknowns. One way to proceed is to view the process of financing your Company as sequential, although in fact it is often necessary to overlap the stages. Recognize that the overlapping of normally sequential events adds risk to the process, and it becomes important for the entrepreneur to adroitly re-order their efforts in response to changing conditions. This is a very useful ability in all aspects of corporate development. The stages of the fundraising process can vary; in this article a ten-step model will be presented -- the Decathlon model. Step 1. Evaluate your business concept and organization as an opportunity: its strengths and limits will help define your potential capital sources. Banks and other lenders evaluate the safety of their money, focusing on the factors that ensure that they will get their money back when it is due. On the other hand, venture capitalists and other early professional investors are willing to risk their entire investment -- but only when a realistic possibility exists that their investment will be multiplied many times. Thus businesses that can initiate or dominate markets that can grow only to $5 or $10 million are not of interest to venture or seed funds, in most cases. Market opportunities of $100 Million or more excite investors -- provided they believe that you have the ability to exploit the market opportunity, and that your business can protect itself from the future competition that will certainly develop once you have defined that opportunity. The possibilities for funding can also be defined by the quality of the management team. A nonideal market opportunity can be made attractive when the effort is led by management that has succeeded before. With an inexperienced management team, it can be advantageous to add one or more seasoned members. For most start-ups there is insufficient cash to compensate seasoned managers, making use of equity compensation common. It is also common to initially build an experienced management team with part-time staff. Step 2. Determine how much money you will need soon (and later)?

The glib answer is, "(much) more than you think". Even without significant equipment or related capital needs, it is surprising how much cash is needed to fuel a start-up beyond the initial stage, when the whole enterprise is existing on sweat equity and chewing gum. Many entrepreneurs think that when they begin to sell product, the cash crunch will be over. When the product is shipped and if sales are great, this actually generates more cash needs -- not less. Growth of 50%-200% per year, common for high-tech start-ups, typically requires cash to support growing receivables, selling and product support costs, and a myriad of other functions. Sometimes it is possible to get customers to fund the company's growth, but this is not usually true. Step 3. Realize the likely type(s) and level of financing your start-up will attract. Most start-ups are initially funded by the entrepreneur and his family or founding team. But it is rare that the level of available funding from these sources is sufficient. Bank financing is not usually available to start-ups unless fully collateralized by deposits from the entrepreneur or a sponsor. Even then, the bank will be reticent unless it has confidence in one or more of the principals. It is helpful to have a founding team which includes high liquid-net-worth individuals. If your start-up is capable of creating and defending one or more large market segments (see Step 1), then major venture capitalists should be targets for your financing. In a rare case, the entrepreneur can choose from many offers of seemingly unlimited funds. Usually, funding of only $50-100k is offered at the seed stage, and $250-750k in the first full investment round. If your concept does not address the largest opportunity, then regional SBIC or seed funds may still consider funding you. Individual investors, including professional "angels" and "rich uncles", can be the source of initial funds beyond those provided directly by the founding team. But these funds are generally inadequate and it is necessary to develop professional financing relationships as early as possible. When your start-up has been through due diligence and received an investment from a respected seed or venture capital group, then additional investments are facilitated. In some cases (based largely on the type of technology and potential products to be developed), federal, state, or commercial R & D funding is an important source of early-stage financing. In Michigan, the non-profit organization, MERRA, provides valuable assistance to start-up businesses thinking about these sources of funding. MERRA's services for start-up companies are largely funded by an economic development grant from the state of Michigan; its phone number is 734-930-0033.

Step 4. Complete the management team. At a minimum, the entrepreneur must be able to name a management team with financial, marketing, and (if appropriate) technical leadership. Identifying talented operations/manufacturing and sales management may also be important. Clearly, this team may not as yet all be on-board, but you should have letters and accompanying vitae indicating that they will join the start-up, and on what basis and conditions. When you complete the initial Business Plan (see Step 5), the timetable and financing model for the management team should be complete. If you cannot identify an individual for one or more of the critical management roles, describe how the Company will effectively operate until such members are found and recruited. Remember, it is acceptable in all but the largest start-ups to rely on part-time staff and consultants to fill several management functions. But the Business Plan needs to include supporting documentation regarding these people and indications of commitment of sufficient effort over the necessary time period. Although it may seem premature to include a long-term management plan in a Business Plan, it is important to wrestle with a few issues right at the start. One issue important to investors is the succession plan for CEO. Obviously, investors must have a great deal of confidence in the entrepreneur serving as CEO at the time of the investment even while recognizing that the entrepreneur may not be an appropriate CEO at a future stage of the Company's development. Investors appreciate founders who recognize this fact and can define continuing personal roles that will enhance the Company's future prospects. Step 5. Prepare for fundraising: refine the business idea; write the Business Plan and Executive Summary. You may have already written your initial business plan, but most likely no formal plan is yet on paper. It is critical that you do this now; your (future) management team and other advisors can assist you in completing and refining the Plan, and in developing realistic and complete financial projections and assumptions (this is particularly difficult for inexperienced entrepreneurs). It is important that you and your advisors validate as many of your assumptions as is possible. This is particularly true for the Market Analysis and Competition sections. Most entrepreneurs fail to recognize that new competitors will arise even if there are none at this time. It is critical to recognize competition from alternative approaches, as well as possible direct competitors. It is also crucial to realize that some big companies can effectively take over your market in a very short time. After you have completed the Business Plan and it has been critiqued by your advisors, refine the Executive Summary. This 1 to 4 page document is all that will be read by most of the

10

potential investors you will contact. Keep it as short as possible, but fill it with enticing information about you and your business opportunity. Step 6. Evaluate & confirm the legal issues. Before actually completing the Business Plan and seeking financing, review all of the legal aspects of your business. This is one area where the help of outside experts is critical because you need to anticipate the due diligence (see Step 8) concerns your investors will raise, so that you have time to adequately resolve them -- preferably before they are even raised. One key area of concern will be your legal rights to the intellectual property underlying your business concepts. If patent and trademark searches have not yet been conducted to be sure that your intellectual property does not infringe the rights of others, now is the time to do so. Similarly, now is the time to put in place strong agreements with employees and consultants protecting the confidentiality of your proprietary information, as well as confirming your rights to intellectual property they may have assisted to develop. When due diligence questions about the validity of your intellectual property are raised, you want quick, clean and clear responses. Patent and trademark applications should be filed at this time -- before proprietary ideas are exposed to numerous investors who you don't know and can't control. You will also need to develop a good confidentiality agreement for potential investors to sign and will need to decide just how much proprietary information you will give to investors and at what stage of your negotiations. Other legal areas you need to be concerned about include: Developing a clear written record of all of your equity owners and persons having legal rights to purchase your equity. Putting in place written agreements describing employment terms for management and key consultants. Understanding the limitations that the securities laws place on how you raise capital so that you don't find yourself in the position where you have to turn away a ready, willing and able investor because of a technical violation of applicable rules. Step 7. Make contacts; find lead investor(s). Networking -- the key word for the 90's and beyond. Recognize that most professional investors do not select their investments from business plans mailed to them. Personal recommendations from sophisticated members of the entrepreneurial or investment community count a great deal in getting the attention of big money. In Michigan, regular participation at regional Entrepreneurial meetings sponsored by the Michigan Technology Council, Ann Arbor's New Enterprise Forum, the Southeastern Michigan Venture Group, etc., can be invaluable for identification of Angels, Bankers friendly to small

11

business, venture capitalists, and others. In addition, being familiar to these communities will benefit management recruiting and satisfying other needs. Once you have one or more initial outside investors, they will act as advocates for your business; their standing in the investment community will affect your future financing, as will known, strong members of the management team. Step 8. Begin due diligence. The process of due diligence begins when a potential investor or acquirer asks questions about your current status and business concepts. Due Diligence practices vary significantly, but almost always contain financial and legal reviews, independent marketing and technical analysis (the latter when appropriate), personal and/or client reference checking, and much more. The process can distract company management, stalling or reversing company development. However, due diligence also produces information that is highly useful to management and is difficult to otherwise obtain. Entrepreneurs rarely take the time to develop this information in the absence of the due diligence process. Start-up companies may need assistance in successfully meeting due diligence requirements. This is particularly true in typical cases where the entrepreneur has not kept a complete paper trail on past events. Step 9. Close financing -- in stages if needed. Completing new investments can be quite rapid for financing from relatives or Angels, but most venture funding requires 3 to 6 months or more from first contact to closing. The speed of closing investments can be inversely related to the need for the money, and the old axiom about seeking financing when you don't need the money is valuable advice. In reality, start-ups always need money, but your financing plan should recognize that, at certain times, your business will be more attractive to others. Success in funding can depend on your skill and luck in timing, as much as on other factors. It can be helpful to Close initial funding with one or more investors while due diligence proceeds with others, although it is important to not make commitments that are contingent on other possible investments. You should also reward and protect your first investors for their prescience. Step 10. Follow the Business Plan, as it continually changes. Your investors will expect you to live up to your Business Plan. The term sheet of most venture capital investments punishes the founders with dilution if the Company does not achieve goals given in the Business Plan (usually measured by financial performance).

12

Nevertheless, the Plan should be continually adapted to changing circumstances, so that you and your investors have realistic expectations of the future. An informed, but albeit disappointed, investor is much easier to deal with than a surprised investor. As a result, major changes in the Business Plan should be considered by the Board of Directors, usually with input from large investors. In addition, this is typically the best time to approach investors for revisions in financial performance criteria. Once you have actually missed the standard, investors have little incentive to make such revisions. Finish. When you have successfully raised your first round of external financing, you will feel like you have just completed a decathlon (or the one-event marathon). But you will also be exhilarated and on your way. The next challenge will be to spend those funds wisely in the development of your business. How to Choose the Right Financing Option to Meet Your Goals If you've decided that franchise or business ownership is in your future but you don't have enough available cash, or liquid capital as it is often called, now is a great time to explore your financing options. Learn more about the various types of financing that are available to you. Once you've learned about the wide variety of financing programs that are available and decided which type of financing best fits your goals and your lifestyle, you can easily receive additional information from various lenders by filling out the short form below. Feel free to request information on multiple types of financing. Some Franchisors Offer Their Own Financing Programs Some franchisors offer their own in-house financing programs, or they have partnerships with a particular lending company. The lending company is familiar with their concept and convinced of the validity of the brand, therefore it may be easier to gain funding from a partner company. If a franchisor doesn't offer financing and borrowing the money from friends and family is not an option, you can explore the vast range of financing options available to... Traditional Financing You can get a loan from many banks. You must have a good credit rating, some liquidcapital available, and a strong business plan, as banks tend to be conservative in who they award business loans to. With that said, bank interest rates tend to be competitive. Some franchisors will help you prepare your business plan so it reads well and is convincing.

SBA-Backed Financing The Small Business Administration (SBA) offers SBA-backed loans. These extremely popular business loans can be obtained by many individuals who do not qualify for traditional financing options.

Investing Your Retirement Funds in a Business There are several innovative companies that will roll your 401K or other retirement plan into a business loan. There are no penalties associated with this type of retirement fund

13

conversion. This type of loan enables you to invest in a business without mortgaging your home or using your property as collateral. Home Equity or 2nd Mortgages If you feel comfortable and confident in your decision to purchase a business and own enough of your home to take out a home equity line of credit or second mortgage, this option can be a simple way to obtain the necessary cash to finance a business. You will not need a business plan to obtain this type of finding.

Other Sources of Non-Traditional Financing With the popularity of business ownership increasing, there are more and more financing options available to meet your needs and preferences. For example, with solid credit, you may be able to obtain a business loan almost instantly and online. Additionally, there aresmaller private lenders and brokers that can work with you if you'd like more personalized service.

Whether you've found the ideal franchise for you, or you'd like to research your funding options ahead of time, now is a great time to request additional information about the funding options that appeal to you. Get started today by completing the request for more information form below. NOTE: This offer is available to USA residents only.

14

Conclusion:
Financing a start-up business: Capital market denotes an arrangement whereby transactions involving the procurement and supply of long-term funds takes place among individuals and various organizations. In the capital market, the companies raise funds by issuing shares and debentures of different types. When long-term capital is initially raised by new companies or by existing companies by issuing additional shares or debentures, the transactions are said to take place in the market for new capital, referred to as New Issue Market. But, buying and selling of shares and debentures already issued by companies takes place in another type of market - the Stock Market. Individuals and institutions which contribute to the share capital of the company become its shareholders. They are also known as members of the company. Before shares are issued, the directors of the company have to decide on the following matters: The amount of capital which is to be raised by the issue of shares; The types of shares which will be issued; and The time of issuing the shares. When a company decides to issue additional shares at any time after its formation or after one year of the first allotment of shares, it is required under law that such shares must be first offered to the existing shareholders of the company. If the offer is declined by the existing shareholders, only then can the shares be issued to the public. Such an issue is called rights issue and these shares are known as rights shares. The Government controls the issue of shares and debentures under the Capital Issues (Control) Act, 1947. A large number of financial institutions have been established in India for providing long-term financial assistance to industrial enterprises. There are many all-India institutions like Industrial Finance Corporation of India (IFCI); Industrial Credit and Investment Corporation of India (ICICI); Industrial Development Bank of India (IDBI), etc. At the State level, there are State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). These national and state level institutions are known as Development Banks. Besides the development banks, there are several other institutions called Investment Companies or Investment Trusts which subscribe to the shares and debentures offered to the public by companies. These include the Life Insurance Corporation of India (LIC); General Insurance Corporation of India (GIC); and Unit Trust of India (UTI). Manufacturing companies can secure long-term funds from leasing companies. For this purpose a lease agreement is made, whereby plant, machinery and fixed assets may be purchased by the leasing company and allowed to be used by the manufacturing concern for a specified period on payment of an annual rental. At the end of the period the manufacturing company may have the option of purchasing the asset at a reduced price. The lease rent includes an element of interest besides expenses and profits of the leasing company. Funds can also be collected from foreign sources which usually consists of the following: Foreign collaborators: If approved by the Government of India, the Indian companies may secure capital from abroad through the subscription of foreign collaborators to their 15

share capital or by way of supply of technical knowledge, patents, drawings and designs of plants or supply of machinery. International financial institutions: The World Bank and the International Finance Corporation (IFC) provide longterm funds for industrial development all over the world. The World Bank grants loans only to the Governments of member countries or private enterprises with guarantee of the concerned Government. IFC was set up to assist private undertakings without the guarantee of the member countries. It also provides them risk capital. Non-resident Indians: Persons of Indian origin and nationality living abroad are also permitted to subscribe to the shares and debentures issued by the companies in India. Retained profits or reinvestment of profits An important source of long-term finance for ongoing profitable companies is the amount of profit which is accumulated as general reserve from year to year. To the extent profits are not distributed as dividend to the shareholders, the retained amount can be reinvested for expansion or diversification of business activities. Retained profit is an internal source of finance. Hence it does not involve any cost of floatation which has to be incurred to raise finance from external sources. Trade credit This is the credit which the firms get from its suppliers. It does not make available the funds in cash, but it facilitates the purchase of supplies without immediate payment. No interest is payable on the trade credits. The period of trade credit depends upon the nature of the product, location of the customer, degree of competition in the market, financial resources of the suppliers and the eagerness of suppliers to sell their stocks. Installment credit Firms may get credit from equipment suppliers. The supplier may allow the purchase of equipment with payments extended over a period of 12 months or more. Some portion of the cost price of the asset is paid at the time of delivery and the balance is paid in a number of installments. The supplier charges interest on the installment credit which is included in the amount of installment. The ownership of the equipment remains with the supplier until all the installments have been paid by the buyer. Accounts receivable financing Under it, the accounts receivable of a business concern are purchased by a financing company or money is advanced on security of accounts receivable. The finance companies usually make advances up to 60 per cent of the value of the accounts receivable pledged. The debtors of the business concern make payment to it which, in turn, it forwards to the finance company. Customer advance Manufacturers of goods may insist that customers make a part of the payment in advance, particularly in cases of special order or big orders. The customer advance represents a part of the price of the products that have been ordered by the customer and which will be delivered at a later date.

16

 Bank credit Commercial banks play an important role in financing the short-term requirements of business concerns. They provide finance in the following ways: Loans: When a bank makes an advance in lump sum, the whole of which is withdrawn to cash immediately by the borrower who undertakes to repay it in one single installment, it is called a loan. The borrower is required to pay the interest on the whole amount. Cash credit: This is the most popular method of financing by commercial banks. When a borrower is allowed to borrow up to a certain limit against the security of tangible assets or guarantees, it is known as secured credit, but if the cash credit is not backed by any security, it is known as clean cash credit. In case of clean cash credit the borrower gives a promissory note which is signed by two or more sureties. The borrower has to pay interest only on the amount actually utilized. Overdrafts: Under this, the commercial bank allows its customer to overdraw his current account so that it shows the debit balance. The customer is charged interest on the account actually overdrawn and not on the limit sanctioned. Discounting of bills: Commercial banks finance the business concern by discounting their credit instruments like bills of exchange, promissory notes, etc. These documents are discounted by the bank at a price lower than their face value.

17

Bibliography:
http://www.hcp.com/startup_financing_strategy http://www.tenonline.org/art/9510.html http://www.franchisesolutions.com/financing.cfm http://www.sba.gov/smallbusinessplanner/start/financestartup/index.html http://www.entrepreneur.com/money/finance/index.html http://business.gov.in

18