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MGT601 - SME Management - Lecture Handout 05

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SMALL ENTREPRENEUR IN PAKISTAN AND ROLE OF SME IN GLOBAL AND REGIONAL LEVEL

This lecture will introduce the small entrepreneur in Pakistan the activities of SMEs in global and regional level. It will also reveal the role of SMEs in a developing economy.

Salient Features of Small Entrepreneurs in Pakistan

  1. Single Owner Entrepreneur
    He works with his own hands, combines the entrepreneur function of initiating the business making investments, taking decisions and performing managerial functions.
  2. Age Pattern
    The mean age of entrepreneur was found to be 42 years and of their enterprises 12 years. It is comparable to the Korean age pattern (46).
  3. Educational Level
    Differing from industry to industry 60% have school education and 30% have college or better education only 10% have professional or graduation level.
  4. Social Background
    Caste played an important role in certain industries and on the other hand heritage is dominant. But overall it is much diversified.
  5. Sizes and Investment
    Majority started in a small way with less than 10 workers and 1/2 to 2/3 of the firms started with less than 50,000 investments.
  6. Growth
    The growth was fast in case of small firms than in large firms.
  7. Profitability
    Rate of profit is higher in case of small industries in comparison with the large industries.

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MGT602 - Entrepreneurship - Lecture Handout 32

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PRO FORMA SOURCES AND USES OF FUNDS

  1. To identify the types of financing available.
  2. To understand the role of commercial banks in financing new ventures, the types of loans available, and bank lending decisions.
  3. To discuss Small Business Administrative (SBA) loans.
  4. To understand the aspects of research and development limited partnerships.
  5. To discuss government grants, particularly small business innovation research grants.
  6. To understand the role of private placement as a source of funds.

AN OVERVIEW

Different sources of capital are generally used at different times in the life of the venture.

Debt or Equity Financing

  1. Debt financing involves an interest-bearing instrument, usually a loan, the payment of which is only indirectly related to sales and profits.
    • Debt financing (also called asset-based financing) requires some asset be used as collateral.
    • The entrepreneur has to pay back the amount of funds borrowed plus a fee, expressed in terms of interest.
    • Short-term money is used to provide working capital.
    • Long term debt (lasting more than a year) is frequently used to purchase some asset, with part of the value of the asset being used as collateral.
    • Debt has the advantage of letting the entrepreneur retain a large ownership position and have greater return on equity.
    • If the debt is too great payments become difficult to make and growth is inhibited.
  2. Equity financing offers the investor some form of ownership position in the venture.
    • The investor shares in the profits of the venture.
    • Key factors in choosing the type of financing are availability of funds, assets of the venture, and prevailing interest rates.
    • Usually a combination of debt and equity financing is used.
  3. In a market economy all ventures will have some equity, as all are owned by someone.