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the presentation deals the the need of finance and various sources of financing a start up. common queries of banker. issues in bank financing. apprehensions of a banker. how to resolve
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Pradeep Kulkarni kulkarniubi@yahoo.com 7387777958 P2G..YouTube channel of Video Lectures on Banking
Funding for Startups – Role of Bank Finance • 18th July 2020
Objectives • Know why money is raised during their early stage of the entrepreneurship. • Identify the sources available to finance the Project. • Understand the steps involved and proper preparations to raising finance (debt or equity). • Understand Role of Bank Finance in an entrepreneurial venture • Understand common queries of an entrepreneur and also that of a Banker regarding Bank Finance. Possible resolution of the same
Objectives • Describe the various innovative means of funding the project (venture capital/cloud funding etc). • Various Schemes available for MSMEs • MUDRA • STAND UP INDIA • PMEGP
Importance of Finance to an Enterprise • The Nature of the Funding and Financing Process • Few people are well versed with the process of raising investment capital. • Until some one needs to raise capital for their own firm, rarely attempts to know. • Result : Haphazardly dealt critical issue. • Why Most New Ventures Need Funding • There are three reasons most new ventures need to raise money during their early life. • 01. Cash Flow Challenges • 02. Capital Investment • 03 Long period of Product Development Cycle.
Source of Raising Money for Start-Up Equity Capital Personal Funds Government / Institutional support Debt Financing Other (Creative) Sources
Sources of Personal Financing • Personal Funds • Founders contribute personal funds, along with sweat equity, to their ventures. • Sweat equity - the value of the time and effort that a founder puts into a new venture. • Friends and Family • Second Source - for many new ventures. • Often comes in the form of loans or investments, • Sometimes involve as outright gifts, forgone or delayed compensation (for a family member who works for the new firm). Low as rent free Place.
Sources of Personal Financing • Bootstrapping • A third source of seed money for a new venture. • Bootstrapping is finding ways to avoid the need for external financing or funding through • Creativity: Sharing mailing list, Distribution Channel, suppliers, website developer, volunteering speaking at Industry events • Ingenuity: (instead of employees free lancers / contractors, Bartering services • Thriftiness: ( be organized, go for virtual office, get a money mentor • Cost-cutting: or any means necessary. Used equipments, shared workspace, • Because it is hard for new firms to get financing or funding early on, many entrepreneurs bootstrap out of necessity.
Bootstrapping Methods – a Relook Buying used instead of new equipment Coordinating purchases with other businesses Leasing equipment instead of buying Obtaining payments in advance from customers Minimizing personal expenses Avoiding unnecessary expenses Sharing office space with other businesses Applying for and obtaining grants
Two most common alternatives for raising money Alternative Explanation Exchanging partial ownership Usually Share in business for funding. Initial Public Offering – a common way. Recently emerged ways are : Angel investors, private placement, venture capital .. These entities adopt a hybrid approach. Equity funding is not a loan—the money received is not paid back. Instead, equity investors become partial owners of a firm. Equity funding Debt financing is getting a loan. The most common sources of debt financing are commercial banks and through the Government Sponsored Loan Schemes for Small Businesses. Debt financing
Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding
Preparing an Elevator Speech • Elevator Speech • An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. • Why is it called an elevator speech? • If an entrepreneur stepped into an elevator on the 25th floor of a building and found that by a stroke of luck a potential investor was in the same elevator, the entrepreneur would have the time it takes to get from the 25th floor to the ground floor to try to get the investor interested in his or her opportunity. • This type of chance encounter with an investor calls for a quick pitch of one’s business idea. This quick pitch has taken on the name “elevator speech.” • Most elevator speeches are 45 seconds to two minutes long.
Preparing an Elevator Speech • Elevator Speech is a Brief description of your, qualifications, opportunity, product idea and a Market. You have about 60 seconds to explain business idea in most appealing manner:
Sources of Equity Funding Venture Capital Business Angels Initial Public Offerings
Business Angels • Business Angels : • Individuals who invest their personal capital directly in start-ups. • The prototypical business angel • is about 50 years old, ( its an indicative ) • has high income and wealth, • is well educated, • has succeeded as an entrepreneur, and • is interested in the start-up processes. • The number of angel investors in the U.S. has increased dramatically over the past decade.
Business Angels.. continued • Business angels are valuable because of their willingness to make relatively small investments. • This gives access to equity funding to a start-up that needs just Rs.50,000 rather than minimum Rs 500 lacs investment that venture capitalists. Investor too have to minimum invest in VC of Rs.5.00 lacs • Business angels are difficult to find. • Most angels remain fairly anonymous and are matched up with entrepreneurs through referrals.
Venture Capital • Venture Capital • Venture capital firms invest money in start-ups and small businesses which show signs of exceptional growth potential. • Venture-capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. • The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. • A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.
Obligations of Venture Capital fund: • Shall not Invite offers from Public for subscribing for its units and shall only receive monies by way of private placements. • Shall not carry out any other activity than that of venture capital fund • Shall disclose • investment strategy at the time of making investments • the duration of the life cycle of the fund • • VCF shall not get its units listed on any recognized stock exchange till the expiry of three years from the date of issuance of units by VCF • • VCF shall enter into the placement memorandum and subscription agreement which contains terms and conditions subject to which monies is proposed to be raised from the investors. • A copy of the placement memorandum and subscription agreement will be placed with the Board along with the actual money collected • VCF shall maintain its books of accounts, records and documents for a period of 8 years
Venture Capital • Venture Capital • Venture-capital firms fund very few entrepreneurial firms in comparison to business angels. • Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. • For the firms that qualify, venture capital is a viable alternative for equity funding.
Venture Capital • An important part of obtaining venture-capital funding is going through the due diligence process: • Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time. • Some venture capitalists also specialize in certain “stages” of funding. • For example, some venture capital firms specialize in seed funding while others specialize in first-stage or second-stage funding.
Initial Public Offering(1 of 3) • Initial Public Offering • A company’s first sale of stock ( capital/Shares ) to the public. • Stock is traded on Bombay Stock Exchange /National Stock exchange • An IPO is an important milestone for a firm. • Typically, a firm is not able to go public until it demonstrates itself as viable and offers a bright future to investors
Initial Public Offering(2 of 3) Four reasons that motivate firms to go public Reason 1 Reason 2 Reason 3 Reason 4 An IPO raises a firm’s public profile, making it easier to attract high-quality customers, alliance partners, and employees. An IPO is a liquidity event that provides a means for a company shareholders (including its investors) to cash out their investments. Is a way to raise equity capital to fund current and future operations. By going public, a firm creates another form of currency that can be used to grow the company.
Initial Public Offering(3 of 3) • Initial Public Offering (continued) • Although advantageous but a complicated and expensive process. • - Hire a merchant bank / investment bank • Such a Bank acts as an advocate and adviser and walks a firm through the process of going public. • As part of this process, the merchant takes the firm’s top management team • on a road show, which is a whirlwind tour that consists of meetings in key cities where the firm presents its business plan to groups of investors (in an effort to drum up interest in the IPO).
Commercial Banks • Banks • Historically, banks have not been viewed as practical sources of financing for start-up firms. • Such a sentiment is not a knock against banks; • it is just that banks are risk averse, • and financing start-ups is a risky business. • Banks normally evince interest in firms that have • a strong cash flow, • low leverage, • audited financials, • a healthy balance sheet and good management, • Although many new ventures have good management, few have the other characteristics, at least initially.
Common Doubts/Queries of an entrepreneur regarding Bank Finance • Which Bank/Institution Shall I approach (Private, Public Sector, NBFC, RBI, SIDBI, NABARD, RBI etc) • Is it necessary that, I must have to be an account holder for approaching a bank • Can I approach a Bank without any reference (is there any other alternative mode I should follow for approaching ie. Tele callers, DSAs, Agents )
Common Doubts/Queries of an entrepreneur regarding Bank Finance • Am I qualify for loan ( whether it fits into the criteria of bank loan/Scheme) • In case I am disqualified, Is there any alternative • What are all the purposes for which bank would provide loan. (Dilemma – Shall I stick to my project or change as per bank requirement, Shall I state the purpose what bank is expecting and continue with my project) • How much do I need and How much finance shall I get
Common Doubts/Queries of an entrepreneur regarding Bank Finance • In case, the Bank Finance is short of project needs, is that private borrowing should be resorted to • Is that, such financial support increases if there is security in the form of mortgage of property offered to bank • How does the bank determines the quantum of loan
Common Doubts/Queries of an entrepreneur regarding Bank Finance • What sort of documents bank seeks • Whether all the columns / information sought in Application form is necessary. • How the Bank fix repayment schedule? Is it flexible? • Will I be able to meet the repayment criteria, • What if??? • How Shall I protect my enterprise
Once resolved the queries then • Select a Banker • Negotiating the Loan quantum, interest rate, repayment terms • Understand Loan Covenants • Explore options of Trade Credit • Insurance of Assets, Insurance of Self ( Liability coverage)
Common issues /Queries of a Banker would like to resolve : Entrepreneur and Enterprises a) Interview ( First Impression)... i) To ascertain knowledge about project ii) To Involvement/passion, iii) Sources and Owners stake (capital investment ) in the business b) Need, Purpose and Assessment c) To ascertain Prima Facie viability of project (Bankers generally looks into a project on premise of past experience with regard to similar projects financed) d) Where does the borrowed money gets invested. e) Kind of assets are created? f) Whether the assets financed are identifiable and ascertainable
Common issues /Queries of a Banker would like to resolve : Entrepreneur and Enterprises g) The type of finance required – Fund Based or Non Fund Based ( Trade Credit, LG, LC, DPGL, LOC ( Line of credit/letter of comfort), h) The Profitability of customer i) What if the entrepreneur defaults??? j) NPAs
Bank Level Process - • I. Fundamentals of Credit Proposal – 5 Cs • Character – Verification of Personal Details, KYC, Credit History, Information Asymmetry, Pre-Sanction Inspection • Due Diligence – Scrutiny of Loan Application, Credit Information, Financials, market information, verification of Bank Statements, Verification and Assessment of collaterals, Industry Analysis (CrIsinfac, etc) • Capacity – managerial capacity competency of entrepreneur) ie Knowledge and Skills as well financial competency ( Liquidity, Solvency and Profitability) of Business Project • Capital – Leverage, DSCR, ROI • Conditions – Economic, Regulatory and other • Collateral - Valuation and Search report
Bank Level Process • II. Processing the proposal • III. Decision – Quantum and Covenants of Loan • IV. Security Documentation • V. Mortgage formalities if any • VI. Processing Fee and other charges • VII. Regulatory and Mandatory compliances – Registration, CERSAI, CIBIL, Reporting etc
Various Schemes • PMMY – Pradhan Mantri Mudra Yojana • Stand up India Scheme • CGTMSE Scheme – Credit Guarantee Fund Trust for Micro and Small Enterprises • CLCSS – Credit Linked Capital Subsidy scheme • PMEGP – Pradhan Mantri Employment Generation Program • SMILE – SIDBIs Make in India Loan to Entrepreneur • NSIC – Bank Credit Facilitation Scheme • MSMEs 59 Minute Loan
FPO : Farmers Producer organization • FPO : be a body registered and administered by farmers and the organisation must be focused on activities in the agriculture and allied sectors. • Formation and Development : By creating • A coalition of partners by the concerned promoter body, involving civil society institutions, • research organisations, • consultants, • private sector players and any other entity which can contribute to the development of strong viable producer owned by FPO • Role of Central Government: • Nodal Agency : Department of Agriculture and Cooperation Ministry of Agriculture CG
“STAND UP INDIA” “Stand up India” was launched by our Hon’ble Prime Minister on 5th April , 2016 Motto: • To provide credit facility to SC/ST and/or Women Entrepreneur. • Bank loans between Rs.10/- Lac and Rs.100/- Lac for setting up a Greenfield Enterprise. • This enterprise may be in manufacturing, services or the trading sector. • In case of non-individual enterprises at least 51% of the shareholding and controlling stake should be held by either an SC/ST or Woman entrepreneur. • To create an eco system which facilitates and continues to provide a supportive environment for doing business
“STAND UP INDIA” Eligibility: • SC/ST and/or woman entrepreneurs, above 18 years of age. • Loans under the scheme is available for only green field project. Green field signifies, in this context, the first time venture of the beneficiary in the manufacturing or services or trading sector. • In case of non-individual enterprises, 51% of the shareholding and controlling stake should be held by either SC/ST and/or Women Entrepreneur. • Borrower should not be in default to any bank/financial institution.
Pradhan Mantri MUDRA Yojana (PMMY) Action by GOI : Hon’ble Prime Minister on 8th April, 2015 launched PMMY • “Pradhan Mantri MUDRA Yojana“ (PMMY). Motto: • To “ fund the unfunded” • To bring such enterprises to the formal financial system • To extend affordable credit . Potential : • As per NSSO (National Sample Survey Organization) estimate about 5.77 crores smaller of the micro units engaged in manufacturing, trading and service sector , exist in the country. • Majority of them are outside the formal banking fold . • They are unable to sustain or grow due to lack of finance or relying on informal channels, which are very expensive or unreliable.
Pradhan Mantri MUDRA Yojana (PMMY) Eligibility: • All “Non farm enterprises” (Now with effect from 01.04.2016, Agri allied activities also included in MUDRA loans) • under “Micro Enterprises” and “Small Enterprises” segment • engaged in “income generating activities” • engaged in “manufacturing, trading and services “ and • whose “credit needs are up to Rs.10/- Lac” Target group: • Retail Traders: Pan shop, vegetable vendors, Kirana Merchants etc., • Entrepreneurs engaged in Agriculture allied activities like Dairy, Horticulture, Floriculture, Piggeries etc • Professional & self employed persons: Persons undertaking various services like Mechanics, fabricators, Tailors, all service providers etc., • Small borrowers like Shoe repairers, Tent house hirers • Road Transport operators : Cart pullers, Cycle Rickshaw, Auto and taxi operators, etc.
Pradhan Mantri MUDRA Yojana (PMMY) Credit Facilities: • Any type of Fund Based : for Working Capital requirement and Financing Capital Expenditure • No Minimum amount. Maximum Amount Rs.10.00 Lac. Objective of the Scheme • To target these segments of the people into Banking financial system. • In all categories of areas i.e. Rural, Semi Urban, Urban or Metros. • Satisfying the “Eligibility criteria” and • Duly ensuring “all KYC diligences “ Categorization of Mudra Loans:
CreditGuarantee • Scheme Activity: • MinistryofMSME,GOI,SIDBIestablishedaTrustnamedCreditGuaranteeFundTrustforMicroandSmallEnterprises(CGTMSE)toimplementCreditGuaranteeFundSchemeforMicroandSmallEnterprises.ThecorpusofCGTMSEisbeingcontributedbyGoIandSIDBI. • Nature of assistance • CollateralfreeloansuptoalimitofRs.200lakhforindividualMSEs • Whocanapply Bothexistingandnewenterprisesareeligible • HowtoApply • Member lending institutions should apply- scheduledcommercialbanksandselectRegionalRuralBanks.
CreditLinkedCapitalSubsidy(CLCS)forTechnologyUpgradation Scheme Activity: Technologyupgradation– presenttechnologyleveltoasubstantiallyhigheroneinvolvingimprovedproductivity improvedpackagingtechniques anti-pollutionmeasures energyconservationmachinery Replacementofexistingequipment/technologywithsameequipment/technologywillnotqualifyforsubsidyunderthisscheme Nature of assistance 15%upfrontcapitalsubsidytoMSEs,includingtiny,khadi,villageandcoirindustrialunits,oninstitutionalfinance CeilingonloansundertheschemehasbeenraisedfromRs.40lakhtoRs.1crore Capitalsubsidyiscalculatedwithpurchasepriceofplantandmachinery,insteadoftermloandisbursedtothebeneficiaryunit.
CreditLinkedCapitalSubsidy(CLCS)forTechnologyUpgradation • Whocanapply • Soleproprietorships,partnerships,co-operativesocieties,andprivateandpubliclimitedcompaniesintheMSEsectorPriorityshallbegiven towomenentrepreneurs • HowtoApply eligibilitycriteriamayapproachbanks,scheduledcooperativebank,RegionalRuralBank(RRB),StateFinancialCorporation(SFC)
Prime Minister’s Employment Generation Programme (PMEGP) Scheme Activity: NationalLevel:KhadiandVillageIndustriesCommission(KVIC) StateLevel:KVICDirectorates,StateKhadiandVillageIndustriesBoards(KVIBs)andDistrictIndustries Centres(DICs)andbanks. Nature of assistance Maximumcostoftheproject/unitadmissibleinmanufacturingsectorisRs.25lakhsandinbusiness/servicesectorisRs.10lakhs. Totalprojectcostwillbeprovidedbythebanksastermloanandworkingcapital.
Prime Minister’s Employment Generation Programme (PMEGP) Who Can Apply above18yearsofagecanapply. ThebeneficiarymusthavepassedatleastVIIIstandardforprojectscostingaboveRs.10lakhinthemanufacturingsector,andaboveRs.5lakhinthebusiness/servicesector. OnlynewprojectsareconsideredforsanctionunderPMEGP.
