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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.
   • The equity may be entirely provided by the owner or may require multiple owners.
   • This equity funding provides the basis for debt financing, which makes up the capital structure of the venture.
   
   

   Read more: MGT602 - Entrepreneurship - Lecture Handout 32

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CREATING AND STARTING THE VENTURE (Continued….)

LEARNING OBJECTIVES

1. To identify information needs and sources for business planning.
2. To enhance awareness of the ability of the Internet as an information resource and marketing tool
3. To present helpful questions for the entrepreneur at each stage of the planning process.
4. To understand how to monitor the business plan

INFORMATION NEEDS

Before preparing a business plan, the entrepreneur should do a quick feasibility study to see if there are possible barriers to success. The entrepreneur should clearly define the venture’s goals, which provide a framework for the business plan. The business plan must reflect reasonable goals.

Market Information

It is important to know the market potential for the product or service. The first step is to define the market. A well-defined target market makes it easier to project market size and market goals. To assess the total market potential, the entrepreneur can use trade associations, government reports, and published studies.

Read more: MGT602 - Entrepreneurship - Lecture Handout 22