Page 144 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 9: Financial Considerations

11. Liquidity ratios are ………………… of the venture’s capability to meet short-term financial Notes
obligations.
12. Ventures exposed to cyclical upswing and downturns maintain high incidence of current
ratio to remain liquid during ………………….

9.4 Sources of Finance: Debt and Equity

In order to prepare an estimation of capital requirement, various types of expenditure that
should be taken into account are promotion and formation expenses, expenses for purchasing
fixed assets, expenses for expansion of business, expenses for current assets and cost of raising
capital, etc.
1. Creation of internal resources: This source, though mobilized in large sized concerns, is
little used in small establishments. This source comprises provision for taxation, provision
for depreciation and reserve fund. The newly started enterprises cannot possibly use this
source.

2. Taking public deposits: The large undertakings, with the object of procuring middle-term
capital, take up term-deposit from the public. The public are given deposit certificate.
Though, it is one of the main sources of financing for established concerns, it is not at all
possible to take up this opportunity for new establishments.

3. Financing by commercial banks: The commercial banks have nowadays met the
short-term financial requirements with the supply of finance to the companies. The
commercial banks have been supplying short-term capital through discounting of bill,
cash credit and advance payment.
4. Financing by financial institutions: Examples includes IFC, IDBI, ICICI, SFC, SIDBI, etc.
5. Financing by other investment institutions: A number of investment institutions have
been developed in both public and private sector to supply finance to the new enterprises
like LIC, GIC, Tata Investment Trust, etc.
6. Personal finance: In case of starting a new venture, the entrepreneur provides himself for
supplying capital by investing his own or family savings. These include cash and personal
assets that can be converted into cash. In most cases, the small-scale businesses and family
businesses are developed by entrepreneur’s own capital. For this, an entrepreneur might
have set himself some months or years ago and must have already prepared financially
for it. But no large-scale enterprise can be developed by financing of entrepreneur’s personal
capital.
7. Government grants: In specific section, there is provision for grants from government to
be financed to new enterprises. Government usually provides adequate finance as grant
and subsidy to those cases which are recognised as priority sectors. Thus, by means of
grant and subsidy from government, capital is supplied to the entrepreneurs.
8. Others: Apart from the various sources stated above, the indigenous money-lenders or
bankers supply capital on conditional basis to the new entrepreneur. This may be procured
from venture capital firm also. Capital may be provided by lease financing.

9.4.1 Equity Financing

If the new venture is of company form of organization, then it can issue shares to public subject
to the approval of the Company Law Board and thereby procure necessary capital for the
enterprise. The share represents ownership. The value of a share is not very much.

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