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Resource needs for entrepreneurship notes

Institution: College

Course: Certificate/Diploma in Electrical Engineering

Content Category: Class Notes

Posted By: 6611588

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Number of Pages: 28

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Here is well detailed entrepreneurship notes on resource needs for the entrepreneurship
RESOURCE NEEDS FOR ENTREPRENEURSHIP

In this lecture we shall discuss the sources of business finance which include equity finance, debt finance – loan, bills of exchange. ,factoring ,trade debtors ,accrued expenses ,credit card buying (plastic money) ,debenture finance, invoice discounting (confidential factoring) ,factoring ,sale and lease –back ,sale of an asset, and purchase.

General objectives
By the end of the course the learner should be able to identify the appropriate sources of funding for entrepreneurship. At the end of this lecture you should be able to:
1. Explain the Various sources of finance for entrepreneurship
2. Discuss the advantages and disadvantages of the various sources of finance
3. Identify factors that influence the various sources of finance sought

5.0 Sources of Business Finance
? The entrepreneur may obtain finance from the following main sources.
o Debt financing
o Equity financing
o External and internal sources.
? Debt financing requires a borrowing system and the entrepreneur is bound to pay back the funds borrowed together with interest payable.
? Debt financing can be long term or short term. Depending on the lender collateral, amy be required.
? Equity financing does not require collateral and offers the investor some form of ownership position in the business.
? Internal financing are funds generated from several sources within the company, they include profits sale of Assets, reduction in the working capital accounts receivable, retained profits e.t.c
? External sources of finance may come from family members, credit suppliers, government programmes, grants e.t.c.

5.0.1 Equity Finance
? It the largest source of finance to a business organization and usually forms the base of which other finances are raised.
? Equity is the total sum of the business ordinary shares plus the retained earnings also known as revenue reserves.

a) Ordinary share-capital
? It that finance contributed by ordinary shareholders of a business. It is raised through the sale of the company’s ordinary shares- who are the real owners of the business.
? The finance type is only raised by limited companies and is permanent in nature and can only be refunded in the event of liquidation.
? It earns ordinary dividends as a return to the investments.
? The investors carry voting rights and usually each share is equal to one vote.
? The ordinary shares are quoted at the stock exchange where they are sold and bought.
? The finance carriers the highest risks in the company because it gets its return after other finances have got their and also in the event of liquidation is it paid last.
? The ordinary dividends are not a legal obligation on the part of the company to pay.
? Where the profits are good ordinary shareholders get the highest return because their dividends are varied.
? This type of finance grows with time and this growth is equity which basically is facilitated by retention earnings.

Advantages of Ordinary Share Capital to Shareholders
? Ordinary shares have a right to vote and their votes influence the company’s activities.
? Ordinary shareholders can use their shares to secure loan.
? Ordinary shares are easily transferable.
? The owners of the ordinary shareholders earn dividends in perpetuity.
? The fluctuating nature of dividends is earned.
? The ordinary shareholders benefit from the residual claim in the event of liquidation.

Disadvantages of Ordinary Shareholders.
? Carry variable returns in case of low or non-profit dividends are not paid..
? Incase of liquidation an ordinary shareholder may lose everything.
? The sale of more ordinary shares dilutes ownership of the existing shareholders.
? The dividends of an ordinary shareholder are double taxed.

b) Retained earnings (revenue reserves)
? This is a source part of equity finance which arises out of undistributed profits over and above dividends paid to shareholders
? It is a cost free source of finance and its cost is opportunity cost in terms of foregone dividends to ordinary shareholders.

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Resource needs for entrepreneurship notes

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