CU-BBA-SEM-V-Entrepreneurship Development-Second Draft

unorganised ways of selling/ marketing, the MSME sector faces obstacles in exploring new markets and in retaining the existing ones. To avoid all this, the Procurement and Marketing Support Scheme has been introduced to advance the marketability of services and products in the MSME sector. The Marketing Assistance Scheme is operated and run by the Ministry of Micro, Small and Medium Enterprises. Micro, Small and Medium Enterprises, industry associations and organisations which are related to the MSME sector can avail the Marketing Assistance Scheme for funding their marketing activities and This sector is characterized by absence of strong brand presence in the market and also largely unorganized marketing network unlike large enterprises. Due to resource limitations, the access to foreign market is not commensurate to their potentials. Participation in International Exhibitions/Trade Fairs held in Foreign Countries. Space rent: Up to 75% of the actual charges for renting exhibition space in trade fairs or exhibitions. Up to 95% of the actual charges for SSI or MSME Enterprises belonging to NE Region or Women or SC/ST Entrepreneurs. Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last six decades. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. The various objectives of the scheme of marketing are as follow: To enhance marketing capabilities & competitiveness of the MSMEs. To showcase the competencies of MSMEs. To update MSMEs about the prevalent market scenario and its impact on their activities. 12.2 PROCUREMENT OF INDUSTRIAL EQUIPMENT MRO (Maintenance, Repair and Operations) plays a major role in the uptime, productivity and, ultimately, profitability of every manufacturing organization. Without effective MRO management and practices, downtime will increase, maintenance processes are disorganized, and overall costs can quickly spiral beyond budget. Procurement is a key component of effective MRO — in many ways — forming the backbone of an MRO strategy. Industrial procurement goes beyond simply ordering parts (although that function plays an important role that is not as simple as it may seem). Today’s best procurement strategies involve advanced technology, data analysis, collaboration, communication, relationship management and more. These strategies are critical in developing a reliable, cost-effective plan — one that helps to ensure MRO parts are on hand when needed, are easily located, are part of an intuitive overall maintenance function, and are procured cost-effectively. 201 CU IDOL SELF LEARNING MATERIAL (SLM)

Without these strategies in place, your business is not operating as well as it could be, and is likely losing ground to competitors. This piece will look at how to develop a reliable, economical strategic sourcing process — applicable to direct spend and indirect procurement strategies. The 5 Most Effective Procurement Strategies for Reliability and Cost Efficiency These strategic purchasing tactics have been identified as the top ways to improve your MRO and procurement functions. You can reap the benefits in productivity, quality, performance and profitability.  Incorporate technology - Technology continues to impact most every area of the manufacturing and industrial sectors, and procurement is no exception. By incorporating technology such as sensors, inventory monitors, storeroom controls, asset performance tracking, and even AI and machine learning, procurement functions can harness vast amounts of data to aid in decision-making. We’ll expound on data later, but in this context, it can play a major role in more proactive, informed ordering, supplier selection, maintenance processes, etc. With more information further in advance, you are better equipped to remain in control and avoid costly surprises and emergencies.  Increase your focus on downstream benefits - Procurement does not exist in a vacuum. Faster, more streamlined procurement does not just mean hitting benchmarks or assuring that a part is on hand for the next repair — it plays a critical part in production speed and time to market. By presenting procurement as a key business function within the larger ecosystem of the facility, you are more equipped for budget and resource buy-in from stakeholders. Further, you can successfully integrate procurement processes with other business functions.  Develop and improve supplier relationships - Suppliers are often viewed as mere commodities or, worse, adversaries. In reality, the supplier relationship should be treated as the integral component of the procurement function that it is. By inviting collaboration with suppliers and focusing on mutual success metrics, you are better equipped to work as a team rather than in the adversarial way that occurs all too often — to the detriment of both parties.  Understand the entire supply chain - Rather than only looking a step or two upstream in the supply chain (to immediate suppliers, for example, and their suppliers) today’s availability of data, information and technology give us the potential to examine and analyse the entire supply chain — historically and in real time. Harnessing these tools can assist with early detection of potential supply chain disruptions, and could help you identify backup and supplemental supplier solutions — so you can avoid costly delays. 202 CU IDOL SELF LEARNING MATERIAL (SLM)

 Apply data and metrics - As mentioned above, data can contribute to more proactive, predictive procurement tactics. Yet with a large swath of data available from today’s technology, you can go even further — using data to track and analyse suppliers and develop performance benchmarks. By tying these benchmarks to the success of you and your suppliers, you are equipped to identify and pursue tangible performance — and cost — benefits. At ATS, we offer supply chain and procurement services as part of our MRO asset management solution. We are experts in results-oriented program implementation — driving efficiency, reducing downtime and eliminating manufacturing waste. Our experience and services include intra-site logistics, warranty tracking and specialists who focus on hard-to- find parts sourcing. For more information, contact ATS today. Manufacturing Equipment: 6 Steps to Plan your Purchase Taking the time to calculate all your costs and benefits will pay off in the long term. Share Acquiring manufacturing equipment for your company may be one of the biggest financial decisions you make this year. Purchasing new equipment doesn’t have to be daunting, says Lance McLellan, Manager, Ontario Automotive Industry at BDC. But purchasing new equipment requires planning. He offers the following steps to ensure you successfully plan your equipment purchases. Assess the Equipment you have Now McLellan recommends you start by taking a deep dive into your company’s long-term goals, which includes an audit of your existing equipment. “It’s important to understand the efficiency of the equipment you have before deciding to replace aging equipment,” says McLellan.Track the machine’s cycle time and uptime, which is when the machine is producing revenue, as well as any downtime required for regular or unscheduled maintenance. This information will allow you to determine if newer equipment will generate the return on investment required to justify the purchase. Create a Capital Expenditure Plan You will then be ready to map equipment purchases to your company’s long-term plan. “A capital expenditure plan includes additions of new equipment, but it should also consider planned downtime of your existing equipment, and predict end-of-life, so you can prepare for replacement cycles,” says McLellan. Large equipment pieces are not sitting on a retail shelf. After an order is placed, it could take six, eight or 12 months for your supplier to manufacture new pieces. 203 CU IDOL SELF LEARNING MATERIAL (SLM)

“If you’ve done your capital expenditure plan and understand the cycle times of your equipment, you’ll know if the newest model is truly a cost-effective choice,” says McLellan. “Don’t be afraid to shop around for a different supplier.” Have a Contingency Plan for Unscheduled Breakdowns? It’s difficult, if not impossible, to replace large pieces of equipment quickly. The purchase of large equipment is usually a custom order and requires long lead times. “Large equipment pieces are not sitting on a retail shelf,” says McLellan. “After an order is placed, it could take six, eight or 12 months for your supplier to manufacture new pieces.” Lead times are longer for foreign manufacturers and you might have to make progress payments as the equipment is being made. “90% of the money is out the door before you even have the equipment on site,” says McLellan. “In most cases, Canadian banks don’t provide funds for these payments because, until the machine is on Canadian soil, they can’t register a security charge.”He recommends bringing your financial institution into the planning discussions as early as possible. Do a Cost Benefit Analysis? Acquiring new equipment isn’t always the best solution, says McLellan, particularly if you only need the machine for a short period of time, or for small parts of a larger project. If you’re only using the equipment to fulfil a three-year contract and you don’t see other profitable opportunities, maybe it’s better to outsource that piece of work for three years. Consider the long-term usage of the equipment and how much profit it will generate in its lifespan. “If you’re only using the equipment to fulfil a three-year contract and you don’t see other profitable opportunities, maybe it’s better to outsource that piece of work for three years.” Calculate your Total Cost of Ownership “If you decide to buy or lease, recognize that your equipment acquisition costs are more than just the base price. There is the principal amount, but there are also costs associated with using floor space, interest on financing, installation, training your employees on the equipment and downtime associated with maintenance.” After calculating your total cost of ownership, you may find the costs of outsourcing to be lower. Or you could find a different piece of equipment that has potential to generate more overall revenue, and one that can offset other costs. Consider your Physical Location “Manufacturing equipment can be large and take up a lot of square footage on a shop floor,” says McLellan. “You need to think about where the equipment will go and what sort of lead time is required to prepare the space.” 204 CU IDOL SELF LEARNING MATERIAL (SLM)

Depending on the size and weight of the equipment, you may need to check the strength of your building’s foundation or consider adding pits, if the machine needs to sit below ground level. This should be considered when calculating your costs. 5 Best Practices when Acquiring new Manufacturing Equipment 1. Take a test drive - Most equipment manufacturers have demonstration facilities so you can get a clear idea of how the equipment looks, feels and operates. 2. Determine what’s included in the price - Warranties on new equipment are usually for one year. But some include a maintenance or service agreement for a short period after purchase.“Equipment manufacturers usually provide support until the machine is operational,” says McLellan.Most new equipment also includes limited training for staff. It’s worth paying for additional training for key production staff so they can train others in the future. 3. Consider buying used equipment - If you’re looking to replace something standard, you may be able to save money by purchasing pre- owned equipment.“Used equipment in the manufacturing space can offer huge cost savings,” says McLellan. “Considering the life span of some pieces is 15 or more years, companies can often pick up a piece at a huge discount and still have a good 10 years of life left in them.” 4. Examine different payment methods - The two payment options are leasing or financing.“Your best option is to match your financing or leasing term to the length of your contract,” says McLellan. “If the equipment will be used across your business, match your payments to the estimated life of the equipment.”Look for a financing option that allows you to postpone principal at the beginning of the loan to give you time for installation, testing equipment and training staffs. With a postponement, principle payments would ideally start once your equipment is operational and generating revenue. 5. Consider digital integration - Forward-thinking companies are integrating their digital and information technology strategy into all capital purchase decisions. There are cutting-edge technologies on the market that can help you improve tracking and productivity.“Always look for equipment that allows for data collection,” says McLellan. “Whether it’s new or used, the technology must be upgradeable and interconnect with your existing equipment and planned acquisitions.” 12.3 MARKETING SUPPORT The Micro, Small and Medium Enterprises (MSMEs) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost 205 CU IDOL SELF LEARNING MATERIAL (SLM)

than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and contribute enormously to the socio-economic development of the country. Fast changing global economic scenario has thrown up various opportunities and challenges to the MSMEs in India. While on the one hand, many opportunities are opened up for this sector to enhance productivity and look for new markets at national and international level, it has also, on the other hand, put an obligation to upgrade their competencies to meet the competition as new products are launched at an astonishing pace and are available worldwide in short time. Micro, Small & Medium Enterprises do not have any strategic tools / means for their business/ market development as available with large industries. In the present competitive age, Marketing is one of the weakest areas wherein MSMEs face major problems. Marketing Assistance Scheme Marketing, a strategic tool for business development, is critical for the growth and survival of micro, small & medium enterprises. Marketing is the most important factor for the success of any enterprise. Large enterprises have enough resources at their command to hire manpower to take care of marketing of their products and services. MSME sector does not have these resources at their command and thus needs institutional support for providing these inputs in the area of marketing. Ministry of Micro, Small & Medium Enterprises, inter-alia, through National Small Industries Corporation (NSIC), a Public Sector Enterprise of the Ministry, has been providing marketing support to Micro & Small Enterprises (MSEs) under Marketing Assistance Scheme. Emergence of a large and diverse services sector in the past years had created a situation in which it was no longer enough to address the concerns of the Micro & Small Enterprises (MSE) erstwhile known as Small Scale Industries (SSI) alone but essential to include the entire gamut of enterprises, covering both SSI Sector and related service entities, in a seamless web. There was a need to provide space for the small enterprises to grow into medium scale enterprises, for that is how they will be able to adopt better and higher levels of technology and remain competitive in a fast globalizing world. Thus, as in most developed and developing countries, it was necessary that in India too, the concerns of the entire range of enterprises – micro, small and medium, were addressed and the sector was provided with a single legal framework. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 addresses these issues and also other issues relating to credit, marketing, technology upgradation etc. concerning the micro, small and medium enterprises. The enactment of MSMED Act 2006, w.e.f. from 2nd October, 2006 has brought medium scale industries and service related enterprises also under the purview of this Ministry. The need of the hour presently is to provide sustenance and support to the whole MSME sector (including service sector), with special emphasis on rural and micro enterprises, through suitable 206 CU IDOL SELF LEARNING MATERIAL (SLM)

measures to strengthen them for converting the challenges into opportunities and scaling new heights. Thus although the medium enterprises have also been included as the target beneficiaries under the scheme, special attention would be given to marketing of products and services of micro and small enterprises, in rural as well as urban areas. The main highlights and benefits of the Marketing Assistance Scheme are mentioned below:  The overall ceiling of the net budgetary support for participation in an international trade fair or exhibition will be Rs.30 lakh per event. However, the overall ceiling may be increased to Rs.40 lakh in the case of Latin American countries.  For the organisation of domestic trade fairs or exhibitions, the budget would depend on the various components that are required. Some of the components that are considered are transportation, printing material, advertisement, theme pavilion, fabricating, construction, and rent. The maximum expenditure may be limited to Rs.45 lakh.  Financial assistance ranging between 25% and 95% of the space rent and airfare will be provided to entrepreneurs. However, the amount that is provided will be based on the type and size of the enterprise. Marketing Assistance Scheme Eligibility Organisations such as the industry associations and MSMEs that are related to the MSME sector are eligible to apply for the scheme. Support may also be provided to several organisations, industry associations, and institutions that help in promoting MSMEs and organise fairs or exhibitions within India that benefits the MSME sector. The support that will be given is done by co-sponsoring the event. Application Process for Marketing Assistance Scheme The application form along with all the relevant details must be submitted to the Branch Manager at the nearest National Small Industries Corporation office. The guidelines of the scheme can be found on the official website of the Ministry of Micro, Small, and Medium Enterprises. Objectives - The Broad Objectives of the Scheme, Inter-Alia, Include  To enhance marketing capabilities & competitiveness of the MSMEs.  To showcase the competencies of MSMEs.  To update MSMEs about the prevalent market scenario and its impact on their activities.  To facilitate the formation of consortia of MSMEs for marketing of their products and services.  To provide platform to MSMEs for interaction with large institutional buyers. 207 CU IDOL SELF LEARNING MATERIAL (SLM)

 To disseminate/ propagate various programmes of the Government.  To enrich the marketing skills of the micro, small & medium entrepreneurs. Marketing Support to MSMs  Under the Scheme, it is proposed to provide marketing support to Micro, Small & Medium Enterprises through National Small Industries Corporation (NSIC) and enhance competitiveness and marketability of their products, through following activities: Organizing International Technology Exhibitions in Foreign Countries by NSIC and participation in International exhibitions / trade fairs.  International Technology Expositions / exhibitions may be organized by NSIC with a view to providing broader exposure to Indian micro, small & medium enterprises to facilitate them in exploring new business opportunities in emerging and developing markets.  These exhibitions may be organized in consultation with the concerned stakeholders and industry associations etc.  The calendar for these events may be finalized well in advance and publicized widely amongst all participants/stakeholders.  The calendar of events would also be displayed on the Web-site of NSIC. Such expositions showcase the diverse technologies, products and services produced/rendered by Indian MSMEs and provide them with excellent business opportunities, besides promoting trade, establishing joint ventures, technology transfers, marketing arrangements and image building of Indian MSMEs in foreign countries.  In addition to the organization of the international exhibitions, NSIC would also facilitate participation of Indian MSMEs in the select international exhibitions and trade fairs.  Participation in such events exposes MSMEs to international practices and enhances their business prowess.  These events provide a platform to MSMEs where they meet, discuss, and conclude agreements on technical and business collaborations. 12.4 SUMMARY  The Marketing Department plays a vital role in promoting the business and mission of an organization. It serves as the face of your company, coordinating and producing all materials representing the business. It is the Marketing Department's job to reach out to prospects, customers, investors and/or the community, while creating an overarching image that represents your company in a positive light. 208 CU IDOL SELF LEARNING MATERIAL (SLM)

 A marketing strategy refers to a business's overall game plan for reaching prospective consumers and turning them into customers of their products or services. A marketing strategy contains the company's value proposition, key brand messaging, data on target customer demographics, and other high-level elements.  A marketing strategy combines all aspects of the customer journey and gives visibility to each department. This then allows the organization to focus on the resources available, figuring out a way to use them to the best of their ability in order to generate sales and increase competitive advantage.  Marketing, a strategic tool for business development, is critical for the growth and survival of micro, small & medium enterprises. Marketing is the most important factor for the success of any enterprise. Large enterprises have enough resources at their command to hire manpower to take care of marketing of their products and services. MSME sector does not have these resources at their command and thus needs institutional support for providing these inputs in the area of marketing.  Ministry of Micro, Small & Medium Enterprises, inter-alia, through National Small Industries Corporation (NSIC), a Public Sector Enterprise of the Ministry, has been providing marketing support to Micro & Small Enterprises (MSEs) under Marketing Assistance Scheme.  Emergence of a large and diverse services sector in the past years had created a situation in which it was no longer enough to address the concerns of the Micro & Small Enterprises (MSE) erstwhile known as Small Scale Industries (SSI) alone but essential to include the entire gamut of enterprises, covering both SSI Sector and related service entities, in a seamless web. There was a need to provide space for the small enterprises to grow into medium scale enterprises, for that is how they will be able to adopt better and higher levels of technology and remain competitive in a fast globalizing world. Thus, as in most developed and developing countries, it was necessary that in India too, the concerns of the entire range of enterprises – micro, small and medium, were addressed and the sector was provided with a single legal framework. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 addresses these issues and also other issues relating to credit, marketing, technology upgradation etc concerning the micro, small and medium enterprises. The enactment of MSMED Act 2006, w.e.f. from 2nd October, 2006 has brought medium scale industries and service related enterprises also under the purview of this Ministry.  The need of the hour presently is to provide sustenance and support to the whole MSME sector (including service sector), with special emphasis on rural and micro enterprises, through suitable measures to strengthen them for converting the challenges into opportunities and scaling new heights. Thus although the medium enterprises have also been included as the target beneficiaries under the scheme, 209 CU IDOL SELF LEARNING MATERIAL (SLM)

special attention would be given to marketing of products and services of micro and small enterprises, in rural as well as urban areas. 12.5 KEYWORDS  Marketing Assistance Scheme: The Marketing Assistance Scheme is operated and run by the Ministry of Micro, Small and Medium Enterprises. Micro, Small and Medium Enterprises, industry associations and organisations which are related to the MSME sector can avail the Marketing Assistance Scheme for funding their marketing activities.  MSME: MSME stands for Micro, Small and Medium Enterprises. These industries or enterprises form the backbone of our economy and need assistance and protection from other big companies as they lack resources and technology. To do this the government provides some schemes, rebates or counselling to these enterprises.  A Marketing Strategy refers to a business's overall game plan for reaching prospective consumers and turning them into customers of their products or services. A marketing strategy contains the company's value proposition, key brand messaging, data on target customer demographics, and other high-level elements.  MRO: In the business, manufacturing and supply chain areas, the MRO acronym stands for maintenance, repair and operations. It can also refer to the similar maintenance, repair and operating supplies. MRO refers to any supplies or goods that are used within the production process, but that aren't part of the final product.  NSIC: National Small Industries Corporation (NSIC), is an ISO 9001:2015 certified Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSME). 12.6 LEARNING ACTIVITY 1. List few schemes initiated by Government for providing the marketing support to an organization? ___________________________________________________________________________ _____________________________________________________________________ 2. List five best practices when acquiring new manufacturing equipment? ___________________________________________________________________________ _____________________________________________________________________ 12.7 UNIT END QUESTIONS A. Descriptive Questions 210 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1. What do you mean by marketing strategies? 2. Write the meaning of MRO? 3. Define share? 4. Expand MSME? 5. What are the importance of marketing assistance scheme? Long Questions 1. Explain the marketing supports to MSME’s. 2. Discuss about the government measure taken in order to promote the marketing and support the MSME’. 3. Describe the importance and objectives of marketing assistance scheme. 4. What are steps required to follow to successfully plan equipment purchases? Explain in details. 5. What are the most effective procurement strategies? Discuss in brief. B. Multiple Choice Questions 1. What does network marketing involve? a. Direct marketing b. Indirect marketing c. Mouth marketing d. All of these 2. What is marketing management? a. Managing the marketing process b. Monitoring the profitability of the companies prod acts and services c. Selecting target markets d. The art and science of choosing target markets and getting, keeping and growing customers 3. What is Search engine marketing? a. Marking of search engine b. Mark chains with name search engine c. Practice of marketing and advertising through the search engine d. None of these 211 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Which one the following stages of the marketing research process is most expensive? a. Data analysis b. Data collection c. Developing the research plan d. Report writing 5. What does marketing mix include? a. Product or services b. Financing c. Retailers d. Consumers Answers 1-a,2-a,3-c,4-b, 5-a 12.8 REFERENCES Reference  Morris, M. H., & Paul, G. W. (1987). The relationship between entrepreneurship and marketing in established firms. Journal of Business Venturing, 2(3), 247-259.  Webb, J. W., Ireland, R. D., Hitt, M. A., Kistruck, G. M., &Tihanyi, L. (2011). Where is the opportunity without the customer? An integration of marketing activities, the entrepreneurship process, and institutional theory. Journal of the Academy of Marketing Science, 39(4), 537-554.  Knight, G. (2000). Entrepreneurship and marketing strategy: The SME under globalization. Journal of international marketing, 8(2), 12-32. Textbook  Islam, N., & Mamun, M. Z. (2000). Entrepreneurship Development: An Operational Approach: Text & Cases with Special Reference to Bangladesh. University Press.  Burns, P. (2016). Entrepreneurship and small business. Palgrave Macmillan Limited.  Veeraraghavan, V. (2009). Entrepreneurship and innovation. Asia Pacific Business Review, 5(1), 14-20. Websites  https://www.nsic.co.in/schemes/MarketingAssistance 212 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.nsic.co.in/Schemes/ProcurementMarketingSupport 213 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 13: SOURCES OF FINANCE 214 STRUCTURE 13.0 Learning Objectives 13.1 Introduction 13.2 Funds arrangement 13.2.1 Determining Financial Needs 13.2.2 Sources of Financing 13.2.3 New Venture Valuation 13.2.4 Legal and Tax Issues 13.3 Institution 13.4 Agencies 13.5 Government 13.5.1 Mudra Bank Schemes 13.5.2 SIDBI Schemes 13.5.3 NABARD Schemes 13.6 Summary 13.7 Keywords 13.8 Learning Activity 13.9 Unit End Questions 13.10 References 13.0 LEARNING OBJECTIVES After studying this unit, you will be able to  Describe the funding arrangement for industries.  Define different sources of finance available for concerns.  Explain institutions involved in funding.  Explain government intervention in funding. CU IDOL SELF LEARNING MATERIAL (SLM)

13.1 INTRODCUTION Funds and business go hand in hand. The business environment of India is constantly improving and so is the need for funding that is not only required by business organizations but also by NGOs. For business, fundraising is one of the most essential activities as without it any business cannot survive. Availability of the required funds is very important to start and to grow a business, through this funding; there are various developments that take place. There are many functions that take place in a business and to run the operations smoothly, funding is very much required. Lack of funding can be the biggest reason for the business to fail and for the long-term running of the business, it is vital to ensure that the required funds are there at all times. The main sources of funding are retained earnings, debt capital, and equity capital. Companies use retained earnings from business operations to expand or distribute dividends to their shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities). The sources of industrial finance are thus of various types. And so are the instruments of finance. A number of them are modem Such as shares, debentures, and loans from the financial institutions. The old ones like, deposits from public, the finances of managing agents as also of indigenous bankers are on the decline. Every business activity requires funds such as increasing team size, new projects, new sales drive, and product promotions. For different types of business, there are different funding options that suit the business type. There are many organizations in India that are on the lookout for funding for their projects and business but they are unable to find but there are various ways and funding agencies through which they can get the funds for the business. Start-ups are majorly on the lookout for capital funding for their businesses but they also the debts that come with the capital funding that they will be receiving. It is very important to understand the nitty-gritty of funding and funding agencies in India to get the right pick for business. There are many business investors that want to invest in different businesses and projects if they see potential in them. Foreign investors and venture capitalists have been investing in companies in India. It becomes very difficult for the entrepreneurs to raise capital and therefore a thorough knowledge about the funding agencies in India is essential to get funding. Sources of Financing for small business or start up can be divided into two parts: Equity Financing and Debt Financing. Some common source of financing business is Personal investment, business angels, assistant of government, commercial bank loans, financial bootstrapping, buyouts. The main difference between internal and external sources of finance is origin. Internal financing comes from the business. External financing comes from outsider investors, which can include shareholders or lenders who may expect either a percentage of the business or interest paid in exchange. 215 CU IDOL SELF LEARNING MATERIAL (SLM)

13.2 FUNDS ARRANGEMENT A funding agreement is an agreement between an issuer and an investor. While the investor provides a lump sum of money, the issuer guarantees a fixed rate of return over a time period. Funding agreements are popular with high net worth and institutional investors due to their low-risk, fixed-income nature. A fund is a pool of money that is allocated for a specific purpose. A fund can be established for many different purposes: a city government setting aside money to build a new civic centre, a college setting aside money to award a scholarship, or an insurance company that sets aside money to pay its customers' claims. Payment of dividend on share capital, Payment of tax and increase in working capital, all come under application of funds. Payment of dividend on share capital is also called as return of capital. It is a payment done by a company to its investors which is drawn from their shareholder’s equity. Surprisingly, most entrepreneurs fund their business using their own personal savings. According to American Express, this is the single most common source of capital for entrepreneurs. Most entrepreneurs wait until they have at least some money saved in their personal bank account before starting a business. 13.2.1 Determining Financial Needs We now turn to the financial aspects of starting a new business. Financing alone seldom provides a sustainable competitive advantage, but most ventures need financial resources to get started—even those that are primarily bootstrapped or start without business plans. (To obtain optimal benefit from the material in the rest of this chapter and in Chapter 8, students should be familiar with basic accounting and financial statements. In addition to the many excellent textbooks on the subject, online sites can help jump start an understanding or refresh rusty skills. The primary reason for failure is too much debt. A firm with debt must make regular interest payments and must be prepared to repay principle either bundled with the interest payments or all at the end. Failure to make the payments is one cause of business bankruptcy. This flaw can be embedded in the business at the outset if a poor financial structure leaves the founder with too much debt relative to equity; it can also arise later when the business has to borrow to cover expenses; or it can occur as a function of inexperienced management or poor planning. Whatever the origin of this problem, the lesson is that poor financial management, poor planning, and inexperienced management all contribute to business failure. How much money does the entrepreneur need? One of the most important and difficult tasks for start-up entrepreneurs is determining how much money they need. If they raise too little money by underestimating the business’s needs, the firm will be undercapitalized. Undercapitalized businesses may run out of cash, borrowing capacity, and the ability to raise additional equity just when a new infusion of funds could get it over some hurdle. If that happens, the firm goes out of business. It is often said that for new firms “cash is king,” because when an entrepreneur runs out of cash, the king is dead and the business is often lost. It may seem impossible to many entrepreneurs, but being overcapitalized is a significant danger as well. An overcapitalized firm raises too much money and sends the 216 CU IDOL SELF LEARNING MATERIAL (SLM)

wrong signals to the stakeholders. For example, thinking that business is better than it actually is, employees may press for wage and benefit increases. Customers may take longer to pay knowing that the new venture has plenty of cash on hand, and suppliers could demand more immediate payment. If the cash is spent on frivolous perquisites or office decor, investors will lose confidence. Also, excess cash earns no or very low returns, which diminishes total return to investors. Working Capital and Cash Flow Management The entrepreneur must focus on working capital and cash flow from the beginning of the financing process. Accounting profits do not pay the bills; only positive cash flow keeps a business solvent. It is estimated that over 60 percent of the average entrepreneur’s total financing requirements are invested in working capital, 25 percent in accounts receivable alone.4 Sufficient working capital is vital to the survival of the enterprise, and well-managed working capital and cash flow can significantly increase the profitability of the new venture. Working Capital Concepts. Working capital has two components. Permanent working capital is the amount needed to produce goods and services at the lowest point of demand.5 Its form may change over the course of the cash flow cycle (for example, from inventory to receivables to cash), but permanent working capital never leaves the business. As the firm grows and sales increase, the amount of permanent working capital increases as well. Temporary working capital is the amount needed to meet seasonal or cyclical demand. It is not a permanent part of the firm’s financial structure. When these peak periods end, temporary working capital is returned to its source. A firm with too little permanent working capital runs the risk of losing business. If inventory levels are kept too low, stock outs occur and sales are lost. If the venture’s accounts receivable policy is too restrictive, good customers who prefer to pay on credit may turn away. If cash balances are too low, the venture runs the risk of being unable to procure supplies or pay its bills. This diminishes its ability to take advantage of short-term purchasing opportunities and damages its reputation. An enterprise with too much working capital for a given level of sales is inefficient. Stock and inventory levels will be much higher than necessary to fulfil customer orders. Receivables will represent too large a percentage of sales, and the venture will be providing inexpensive financing for its customers. Cash levels will be more than needed for transactions and precautionary uses. Each dollar invested in working capital must return at least the internal rate of return of the rest of the venture’s investment to be “pulling its weight” in the financial structure. The Cash Flow Cycle The cash flow cycle and its importance to the profitability of the firm are illustrated in figure 13.1. The top portion of the figure shows the production cycle from material ordering to finished goods inventory. It also shows the cash cycle from payment for raw materials through the collection of receivables. The bottom half of figure 13.1 illustrates the 217 CU IDOL SELF LEARNING MATERIAL (SLM)

corresponding sources and uses of cash and the formula for calculating the length of the cash cycle. Figure 13.1: The cash flow cycle Segment 1 represents the time period of accounts payable for raw material. The gap between the time the entrepreneur receives supplies and the time she has to pay for these supplies (account payable) is a source of financing. Here it reflects the time from the receiving of materials until approximately half of them are used. Segment 2 represents the time period in which raw materials remain in inventory. This segment corresponds to the time from their entry into raw materials inventory to the time they enter work in-process (WIP) inventory. WIP inventory represents the partially completed product that is still being worked on. Segment 3 represents the time when WIP goods are counted in inventory. They are now finished goods. Segment 4 represents the time goods spend in finished goods inventory, and segment 5 represents the time that goods that have been sold are in receivables. Figure 13.1 gives the formulas for calculating each of these ratios. The figures used to calculate these ratios are found on the proforma balance sheet and income statement for the new venture or on the actual financial statements for the existing business. The total length of the short-term cash cycle is given by the sum of segments 2 through 5 minus segment 1. The top shows a typical cash flow cycle for a sample firm, and the bottom half depicts a “controlled” cash flow cycle with much of the slack and waste removed. The firm, through debt or equity, must finance every dollar of sales for 120 days. What does this mean in terms of firm profitability? If the firm has $5 million in sales before controlling the cash flow cycle, the net working 218 CU IDOL SELF LEARNING MATERIAL (SLM)

capital required for 120 days of sales value would be approximately $1,643,836 [($5,000,000/365) x 120]. The bottom half of the figure shows a hypothetical “controlled” cash flow cycle. After control measures are introduced and the cash flow cycle is tightened, the required working capital is reduced to $616,438. Where has the difference of over $1 million gone? Typically, it goes to reduce debt or to be invested in other assets that can increase sales. For example, (segment 3: 40 - 25 = 15, 15/45 = 37.5 percent). The reduction in working capital requirements could be used to retire the debt incurred to purchase the machine that made manufacturing so much more efficient. This illustrates one of the dramatic effects of tightly managing the venture’s cash: Investments can be made to pay for themselves very rapidly. Another way of seeing the dramatic benefits of cash management is to imagine that the owner of this hypothetical company needs to raise $1 million from venture capitalists in order to expand the business. Venture capital often requires rates of return of between 30 and 50 percent. If the entrepreneur can raise the $1 million through improved cash management techniques, the firm will save between $300,000 and $500,000 per year in finance charges (dividends) paid to the venture capitalists. If the firm is netting 10 percent on sales of $5 million ($500,000), the cash control measures are the equivalent of increasing profitability between 60 and 100 percent. Managing and Controlling the Cycle Many excellent books detail the steps in the process of managing and controlling the cash flow cycle, so we will only summarize them briefly. As the examples presented indicate, however, this is a subject that requires close attention and tenacious control by top management.  Accounts payable: The longer the average accounts payable for the firm, the shorter the cash flow cycle. Therefore, entrepreneurs should develop relationships with vendors that enable them to extend payments when needed. Accounts payable are part of the permanent working capital of the venture and should be managed, not reduced.  Raw materials inventory: This is part of the permanent working capital of the firm, but the entrepreneur must keep it as low as possible. Just-in-time delivery systems, a good management information system, and accurate sales forecasting can help keep raw materials inventory down.  Work-in-process inventory: The Japanese Kanban system of tagging and monitoring all work in process will help, as will the introduction of efficient operations, worker training and incentives, and capital investment.  Finished goods inventory: The managers should seek to develop relationships with buyers that will enable them to deliver as soon as the product is made. If buyers can warehouse the goods, they can take delivery and thereby finance the seller’s finished goods inventory. Accurate sales forecasts and management information systems are vital. 219 CU IDOL SELF LEARNING MATERIAL (SLM)

 Accounts receivable: The key variables are payment terms, credit limits, and collection programs. Customers should be encouraged to pay their bills on time and, if the discount does not hurt margins, given incentives to pay early. Across the Venture’s Life Cycle Will the financial needs of the business change as different challenges arise? Of course. Entrepreneurs must be able to recognize where their firm is in its life cycle and to specify the precise uses of these funds. By demonstrating to investors how the financing will further the venture’s objectives, entrepreneurs significantly increase their chances of closing the deal. Early-Stage Financing There are two categories of early-stage financing: seed capital and start-up financing. Seed capital is the relatively small amount of money needed to prove that the concept is viable and to finance feasibility studies. Seed capital usually is used to investigate the possibilities of a business, not to start it. Start-up capital actually gets the company organized and operational. It puts in place the basics of product development and the initial marketing effort. Start-up capital is invested in the business before any significant commercial sales; it is the financing required to achieve these sales. Start-up capital is also known as first-stage financing. For many businesses, all first stage financing comes from bootstrapping—that is from the entrepreneurs themselves. We introduced bootstrapping in Chapter 5 in the context of writing the business plan. Now we consider it in its financial sense—raising capital from personal sources. Bootstrapping requires a sure sense of the entrepreneurs’ risk/reward preferences. By using only their own money, they can keep more of the rewards of a successful venture, but they also put more of their own assets at risk. These assets frequently include their homes, their bank accounts, and any retirement accounts. Boots trappers frequently max out their credit cards. It is a mistake to bootstrap without considering the next stage. Entrepreneurs can get a business started by bootstrapping, but when it starts to grow, they need outside capital. The amount provided by bootstrapping is almost always limited by the modest net wealth cap of the entrepreneurs and the team. Recycling these dollars as revenue starts to come in can grow the business only so far. Conserving cash is critical. Investing these recycled dollars in fixed assets actually shrinks the potential size of the business since these funds cannot be used for working capital. Eventually a growing business needs to move to the next stage. Expansion or Development Financing There are three sequential categories of financing in the expansion stage. Second-stage financing is the initial working capital that supports the first commercial sales. It goes to support receivables, inventory, cash on hand, supplies, and expenses. At this point, the firm may not have a positive cash flow. Third-stage financing is used to ramp up volumes to the break-even and positive cash-flow levels. It is expansion financing. Throughout the third stage, the business is still private, a majority of the equity still in the hands of the founding top management team. Fourth-stage financing, sometimes known as mezzanine financing 220 CU IDOL SELF LEARNING MATERIAL (SLM)

(because it is between the cheap balcony seats and the more expensive but desirable orchestra seats), is the bridge between the venture as a private firm and the prospect of a public offering. Mezzanine financing enables successful privately held companies to obtain financing without going public, letting the owners keep control. Mezzanine financing is a blend of traditional debt financing and equity financing, with some benefits of both. It has the no-collateral benefit of equity and the control benefit of debt. But in order to make it profitable for the lender, interest rates are frequently much higher than market, in the 20-30 percent range. Lenders also have the right to convert the debt to equity if there is a default. Most new ventures remain small, never going beyond first- and second-stage financing, and almost none will qualify for venture capital funds. Yet at the initiation of a venture, at its creation, all is still possible even if the odds are long. 13.2.2 Sources of Financing The initial financial objective of the entrepreneur is to obtain start-up capital at the lowest possible cost. Cost is measured in two ways. One is the return that will have to be paid to the investor. The other is the transaction costs involved in securing, monitoring, and accounting for the investment. An investor may be satisfied with what appears to be a below-market return on investment, but if the cost of the transaction is significantly high, the entrepreneur may wish to consider an alternative source of financing. The long-term sources of cash for the venture are debt and equity. In most cases, equity financing is more expensive than debt financing: Pure debt has a fixed return over a period of time, but the potential gains for investors in equity financing are unlimited. The types and sources of financing available to the new venture depend primarily on four factors.  The stage of business development: The more developed the business, the higher the chances and the better the terms for outside financing.  The type of business and its potential for growth and profitability: High-potential firms can attract financing at better terms.  The type of asset being financed: The more stable the market for the asset, the easier it is to sell and to recover costs for the lender in case of default.  The specific condition of the financial environment within the economy: When the economy is good, lenders and investors are looking to put their cash to work at a profit. When the economy is poor, investors are conservative and reluctant to invest. The elements of the overall financial environment that should be considered are  Interest rates and their term structure: Under the normal rate structure, short-term rates are lower than long-term rates, so the borrower generally prefers a series of short-term loans. When this is reversed, the borrower prefers a long-term, fixed-rate 221 CU IDOL SELF LEARNING MATERIAL (SLM)

loan. Lenders are most concerned about payback and collateral and try to match the term of the loan with the life of the asset.  The level and trend in the stock market: A high and rising stock market means people have cash and are willing to accept more risk in investing. A falling market makes investors more conservative.  The health of various financial institutions, such as savings and loans, commercial banks, and international financial institutions: Institutions under pressure are very conservative and likely to invest only in ventures that are virtually risk free.  Level of confidence in the economy: High confidence promotes liberal investing.  Government monetary and fiscal policy: When the government is running large deficits and basically monetizing the debt, there are inflationary consequences. Inflation weakens the currency and benefits borrowers. When the central bank (the Federal Reserve Bank in the United States) targets inflation to counteract government spending, the deflationary effects benefit lenders (the bond market). Equity-Based Financing The liabilities and equity side of the balance sheet lists the general types of financing. On the balance sheet, they are listed in ascending order of risk—and therefore cost—to the investor. We begin from the bottom of the balance sheet with equity capital and move up to the less risky and cheaper types of financing. Inside Equity Financing based on an ownership stake in the new venture is called equity. All businesses require equity. Initial equity most frequently comes from the founder, the top management team, and their friends and relatives. Founders traditionally make personal equity investments commensurate with their financial means. They do this for a number of reasons: Their own money is easiest to obtain, putting up money shows future outside investors the entrepreneurs’ level of commitment, and it offers the right incentives to business owners. It is almost imperative that people put up their own money to start their businesses because it proves that they are serious and that they have put something at risk. This is the basic source of start-up capital for entrepreneurs. How much of their own money are they prepared to invest in their business? This is a complicated question. On the one hand, they should be prepared to invest everything so they don’t send the wrong message to other investors. If the entrepreneurs hold back, investors might perceive a lack of confidence in the venture’s success. On the other hand, it is unreasonable to think that starting a business means that an entrepreneur’s financial future will be “all or nothing.” Founders should keep a reasonable amount of capital out of the business, safely set aside to protect their families and themselves. The amount held in reserve depends on the situation, but it is reasonable and fair to set aside money for the following. 222 CU IDOL SELF LEARNING MATERIAL (SLM)

 Children’s education  Retirement accounts (depending on age)  Health savings accounts and insurance  Home equity (depending on the size of the home)  Amortization of previous personal debts Outside Equity Investors who have no personal relationship with the venture are called outside equity investors. Outside equity comes from three sources: private investors, venture capital, and public offerings. Private investors, sometimes called angels, are wealthy individuals interested in the high-risk/high-reward opportunities offered by new venture creation. Private investors are, in fact, the largest single source of funds for new firms. Wealthy investors exist in all communities and all cities in the developed world. The best way to reach these people is through personal introduction by acquaintances or associates: lawyers, accountants, consultants, and others in the economic network of a community. A new development in angel investing is the creation of angel trade groups with names like “Indiana Angel Net” and “Central New York Angels.” The groups meet to discuss investment strategy and to hear entrepreneurs make their pitches. Most have Web sites and a few have full-time staffs. There is even a national organization called the Angel Capital Association whose goal is to raise the visibility of angel investing and help investors benchmark practices and adopt innovations. Wealthy investors will want to see a business plan or offering memorandum. Obtaining expert legal counsel in this process is crucial. Many securities laws, both state and federal, regulate the sale and distribution of stock. Failure to comply with these laws and regulations can enable the investor to sue the entrepreneur for recovery of his or her investment if the company goes broke. The main advantages of obtaining early financing from wealthy investors is their relative accessibility and the size of the investment pool. Also, these individuals may be in a position to lend their positive reputations to the venture when additional funds are needed. There are also disadvantages. Many wealthy people made their money in the professions or inherited it. They may lack the business expertise to advise the entrepreneur wisely. Even when wealthy investors are business people, they may have made their money in different types of business or long ago under different conditions. A second disadvantage is their inability to continue investing in the future—even rich people have limits. The usual range of investments from wealthy individuals is $10,000 to $500,000, with an average investment of about $50,000.14 This may be enough in the early development stages, but additional money will be needed later if the firm is successful. These additional sums may be out of reach for the angel or the angel may not want to put too much money in a single business. 223 CU IDOL SELF LEARNING MATERIAL (SLM)

A third problem concerns the relationship between the angel and the top management team. Private investors tend to be overprotective of their investment. They often call the entrepreneurs or complain when things are not going well. If the business is accessible and local, they may even visit in person, creating headaches for the entrepreneur. Venture Capital It is outside equity that comes from professionally managed pools of investor money. Instead of wealthy individuals making investments one at a time and on their own, they pool their funds along with those institutional investors and hire professionals to make the investment and related decisions. The venture capital industry has long been associated with new venture creation and has its own entrepreneurial history. As in any industry the factors that affect profitability are the power of the buyers (investors), the power of the suppliers (entrepreneurs who supply the deals), the threat of substitutes, the height of entry barriers, and rivalry between venture capital firms. Also, macro environmental factors create both constraints and opportunities for these firms, just as they do for new ventures. These macro factors depend on the type of industry the venture capitalists specialize in. Because industry-specific knowledge is required for evaluating new venture financing proposals, venture capitalists tend to specialize in certain industries. For example, there are high-tech venture capitalists who look for cutting-edge technological investments, distribution-type venture capitalists who invest in ventures that provide logistical benefits, and restaurant specialists who look to invest in the next Domino’s or McDonald’s restaurant chain. Public Offering They are the ultimate source of outside equity and wealth creation. When you own 100 percent of a company that earns $500,000 per year, you make a very good living. When you own 50 percent of a company that makes $500,000 per year, is publicly traded, and is valued at 25 times earnings (25 x $500,000 = $12.5 million x .50 = $6.25 million), you are a multimillionaire. Often, in order to go from well-off to rich, the founders of the venture must take their firm public. This type of financing creates significant wealth because it capitalizes earnings at a multiple (the price-earnings ratio). “Going public” is done with the aid of an investment banker through an investment vehicle known as the initial public offering (IPO). The IPO enables a firm to raise much more equity capital than was previously possible. It also allows the entrepreneur, the top management team, and the earlier investors who still own shares of the firm to sell some shares. This event, often eagerly anticipated by founders and early investors, represents one of the most lucrative financial opportunities in a businessperson’s career. The value of the firm increases by an estimated 30 percent at the completion of a public offering. The appendix to Chapter 7 offers a detailed look at the process of going public. Debt-Based Financing 224 CU IDOL SELF LEARNING MATERIAL (SLM)

Debt is borrowed capital. It represents an agreement for repayment under a schedule at an interest rate. Both the repayment schedule and the interest rate may be fixed or variable or have both fixed and variable components. In most cases, debt costs the company less than equity. Interest rates on debt are historically less than rates of return on equity. Why would entrepreneurs ever seek anything but debt? Because debt often requires collateral and its repayment always requires discipline to meet the regular interest and principal payments. Failure to meet those payments puts the company in default and in jeopardy of forced bankruptcy. If the loan is collateralized (i.e., has encumbered a specific physical asset as assurance of repayment of principal), default may cause the loss of that asset. Therefore, entrepreneurs often seek higher-cost equity because share-owners have no legal right to the dividends of the company, and the equity holder is the owner of last resort. If the company is liquidated or forced into bankruptcy, equity shareholders receive only the residual value of the firm after all other claims are settled. Some entrepreneurs finance their businesses with equity instead of debt for another reason: They often cannot get loans. Banks and other lending institutions are conservators of their depositors’ money and their shareholders’ investments. In certain economic climates, they are extremely reluctant to lend money to risky ventures, and they are hardly ever in a position to lend money to start-ups. Thus, the entrepreneur is forced to raise equity capital in the initial stages and to continue raising equity even after the early stages. Because it is difficult for new and small businesses to procure debt financing, various agencies and departments of the government offer special programs to help. Micro Loan Programs Businesses owned by women and minorities have had difficulty getting debt financing, partly because of discrimination but also because they start the wrong types of business. Small start- ups in service industries have no collateral, have high failure rates, and present no entry barriers to protect against competition, yet the growth rates of start-ups by women and minorities are high. To address the gap between the need for debt financing and the availability of credit, the government and the private sector offer micro loans. The U.S. Small Business Administration manages a micro loan program to help women and minorities get loans of up to $35,000 at market interest rates. Professor Mohammed Yunus founded the Grameen Bank as a way to help women in India pull themselves up from extreme poverty and increase their independence. This micro loan program has made over 5 million micro loans, and Yunus received the Nobel Peace Prize in 2006. Types of Debt Financing The two basic types of debt financing are asset-based financing and cash flow financing. Asset-based financing is collateralized. The most common form of asset-based financing is trade credit. Trade credit covers the period between product or service delivery to the new venture and the date when payment is due. It is not uncommon to have a 25- to 30-day grace 225 CU IDOL SELF LEARNING MATERIAL (SLM)

period before payment without penalty is expected. A discount is sometimes offered for early payment. Asset-based Financing It is simply borrowing money to finance an asset, short-term— seasonal accounts receivables—or long-term—equipment or property. When a specific asset is identifiable with the borrowing need, asset-based financing is appropriate. Cash Flow Financing It refers to unsecured financing based on the underlying operations of the business and its ability to generate enough cash to cover the debt. Short term (under one year) unsecured financing is usually used as temporary working capital. A line of credit is an intermediate level of unsecured financing. Long-term unsecured financing takes the form of a note, bond, or debenture. Because the debt is unsecured, banks may take other precautions to protect their asset (the loan). These protections or covenants are agreements between lender and borrower concerning the manner in which the funds are disbursed, employed, managed, and accounted. For example, an unsecured loan covenant might require the borrower to maintain a certain minimum balance in an account at the lending institution. In this way, the bank can restrict a portion of its funds from general use, raise the cost of the loan to the borrower, and potentially attach the balance in case of default. Further details on this type of financing and its limits are discussed. 13.2.3 New Venture Valuation What is the new venture worth? How can it be valued? Determining value is a problem that cannot be avoided even though the methods for calculating it are uncertain and risky. When a new business is created by purchasing another business or its assets, a valuation is required to ensure a fair purchase price and to determine taxes. A valuation is also needed when a new venture is created and the entrepreneurs need equity investors. In this case, the valuation tells investors approximately what their investment might be worth in the future.26 Investors need this information to calculate their expected return on investment and bargain for a share (proportion of stock) in the venture that will bring this return.Because of lack of historical data, the valuation of new ventures and small businesses is difficult and uncertain. There is no efficient market to determine value since these ventures do not trade their equity on a stock exchange and thus have no market value in this sense. They have no record of accomplishment either, no indication of potential future earnings. Unproven companies need to raise equity without being able to show investors historical returns Nevertheless, valuations must be made. Three basic approaches to valuation include asset-based valuations, earnings-based valuations, and the use of discounted cash flow models. Asset-Based Valuations 226 CU IDOL SELF LEARNING MATERIAL (SLM)

Asset-based valuations reveal the investors’ maximum exposure. The purpose of these valuations is to determine how much the venture would be worth if it were forced to cease operation and be sold for its tangible and intangible parts. Asset-based valuations can also be used to determine the cost of assets. There are four types of asset-based valuations: book value, liquidation value, adjusted book value, and replacement value. Book Value The book value of an asset is the historical cost of the asset less accumulated depreciation. An asset originally purchased for $10,000 and depreciated on a straight-line basis for half its useful life has a book value of $5,000. A fully depreciated asset has a book value of zero even though it may still be worth something. Because accelerated depreciation schedules and techniques are employed primarily as tax shields, during the early life of an asset its book value may understate its economic value. Frequently, the book value of an asset is simply an artifact of accounting practice and bears little relationship to its actual economic value. Adjusted Book Value Sometimes an asset’s book value and its actual economic value are so at variance that book value must be adjusted to give a better picture of what the asset is worth. This adjusted book value can be higher or lower, depending on the circumstances. Upward adjustments are often made to account for land values. Adjusted book valuations increase the value of real estate, which often rises over time, but— because of accounting rules—is always left on the books at historical cost. Many businesses are undervalued on the books because the land they own and control is worth many times the value of the business itself. Examples of this phenomenon include land-based businesses such as hotels, parking lots, and golf courses. Land value can be adjusted downward if, for example, a parcel of property has major environmental problems and incurs clean-up costs. Sometimes neighbourhoods and areas deteriorate for a variety of reasons, and once-valuable property is worth less than its historical cost. Replacement Value Replacement value is the amount it would cost to duplicate the firm’s current physical asset base at today’s prices. When valuation is used for buying or selling a business, the replacement value of the assets can be a point of reference in negotiations between buyer and seller. Because inflation is the historical trend in developed Western economies, the replacement cost of an asset is frequently higher than the original cost. But not always: Because of technological and productive improvements, the replacement cost of computers and computing power is an example of a downward trend in replacement costs. Liquidation Value This is the value of the assets if they must be sold under pressure. Sometimes firms face extreme cash shortages and must liquidate assets to raise cash to pay their creditors. At other times, courts order liquidation under bankruptcy proceedings. When buyers know that a 227 CU IDOL SELF LEARNING MATERIAL (SLM)

venture is being forced to raise cash by liquidating, they can negotiate to pay below-market prices. Often liquidation is done at auction, and the prices paid might be only 10 to 20 percent of the market value of the assets. The liquidation value of assets represents their absolute floor value. From the investor’s point of view, the difference between the value of the investment and the liquidation value of the assets (after priority claims are met) represents the maximum risk or exposure for the investment. Earnings-Based Valuations Earnings valuations entail multiplying the earnings of the venture by a price-earnings ratio or dividing the earnings by some capitalization factor (mathematically equivalent techniques). There are two inherent problems: The evaluator must determine which earnings to use for the calculation and which factor is most appropriate for capitalization. The resolution of these issues is not trivial. Differences in valuation provide arbitrage opportunities that can be practically riskless and very lucrative. Which Earnings? Three possible earnings figures can be used to calculate an earnings valuation. Historical earnings are the record of past performance. This is no guarantee of future achievement, but it is sometimes an indication. In cases of valuation for the purpose of buying or selling a business, sellers rely on past performance for their valuation; after all, their management was responsible for that performance. But in most cases the sellers will no longer be part of management, so the context for the historical performance no longer exists. In such cases, historical earnings should not be used to predict future performance. Future earnings and the historical resource bases are a middle-of-the-road approach to calculating value. They correctly identify for the future the important earnings stream out of which dividends will be paid. Also, the firm’s future earning capacity determines market value. However, the use of the historical resource base assumes that the relationship between the firm’s capabilities and its environment will remain unchanged. This calculation represents the value to a current owner who anticipates no major changes in the assets of the firm, its strategy, or its competitive or macro situation. In a buy-sell situation, the buyer should not rely on this estimate because of the high probability that the underlying resource base will be modified under new ownership. The present and future resource bases make up the most appropriate measure of earnings in both buy-sell and new venture valuations. Future earnings are the basis for future returns which flow directly from whatever new resources and capabilities the firm’s founders and top managers developed. Valuation is a forward-looking process, and its calculation requires estimates of future performance. In addition to the problem of determining which earnings to include and under what circumstances to include them, valuation must grapple with the problem of comparable earnings. Earnings can be stated and calculated in a number of ways: earnings before interest, depreciation, taxes and amortization (EBIDTA), earnings after taxes (EAT), and earnings before and after 228 CU IDOL SELF LEARNING MATERIAL (SLM)

extraordinary items. Extraordinary items should be omitted from earnings calculations because they represent non-normal operating situations and one-of-a-kind events. Valuations focus on an ongoing business, not on special situations. Both EBIDTA and EAT are earnings legitimately used in the valuation process. The advantage of EBIDTA is that it measures the earning power and value of the business fundamentals and underlying resources before the effects of financing and legal (tax) organization. From the viewpoint of a new venture in search of financing or in a buy-sell situation, EBIDTA is preferred because financial and legal structures may be altered according to the tax preferences of the owners. However, EAT is also a reasonable and workable figure to examine. The important consideration is consistency in valuation methods. The entrepreneur should not employ EAT for one scenario and EBIDTA for another. Which Capitalization Factor? Determining the capitalization factor is also an exercise in both estimation and judgment. The capitalization factor or price-earnings (P-E) ratio is the multiple that represents the consensus among investors concerning the growth and reliability of the firm’s earnings over time. The P-E ratio is the price an investor is willing to pay to buy a claim on $1 worth of current earnings. Higher P-E ratios mean that investors believe earnings will be much higher in the future; lower P-E ratios indicate that investors do not believe earnings will increase very much. For example, large, stable, slow-growth businesses are often capitalized at five to ten times earnings. Firms expected to grow as much as or slightly better than the overall economy might have price-earnings ratios in the teens or low twenties. Small firms with high-growth potential often come to market at IPO at multiples of 30-, 40-, and 50-times earnings. Their earnings are valued at higher ratios because certain investors look for the high-risk/high- reward stock that could be the next Google, Microsoft, Cisco Systems, or Genentech. Discounted Cash Flow Models The value of a firm can also be estimated using discounted cash flow (DCF) models. DCF models were originally developed to estimate returns on specific projects over limited time horizons in the context of capital budgeting. They were then expanded for use in valuing publicly held firms traded on major stock exchanges. The application of DCF models to entrepreneurial opportunities is relatively new and must be applied with some caution. 13.2.4 Legal and Tax Issues Experienced legal assistance and advice are critical to financing a new venture and resolving the legal and tax issues confronting it. Failing to obtain a good lawyer and accountant is disastrous, so it’s well worth the trouble of finding such help. Legal and tax assistance is needed for  The formation of business entities  Setting up books and records for tax purposes 229 CU IDOL SELF LEARNING MATERIAL (SLM)

 Negotiating leases and financing  Writing contracts with partners and employees  Advice about insurance needs and requirements  All litigation  Regulation and compliance  Patents, trademarks, and copyright protections Not all attorneys are competent in all the areas listed, but competent legal counsel knows its limitations and can bring in experts as required. As in many other aspects of business, there is no substitute for experience. The best way to find competent legal service is by word of mouth. Entrepreneurs should then follow up any recommendations by checking with legal referral services and personally interviewing lawyers to decide whether they have a good rapport with a particular attorney and whether this lawyer understands the entrepreneurs’ business needs. Good legal counsel is not cheap. Rates can run from $90 to $350 per hour. Some lawyers who specialize in getting new ventures up and running are willing to take equity in lieu of cash as payment for services. There is an old saying that “a person who acts as his own lawyer has a fool for a client,” but some entrepreneurs insist on self- representation. They must then become conversant with the content and process of the law. A course in contracts and real estate law is recommended. Legal Forms of Organization in the United States In the United States there are five major types of organization: sole proprietorships, partnerships, corporations, S corporations, and limited liability companies (LLC). Each has its own characteristics in terms of legal identity and continuity, liability, taxation, and financing regulations. The permits and licenses required for operation vary by form of organization. Sole Proprietorship The easiest organizations to form are sole proprietorships. They make up the majority of small businesses and self-employed persons. The company is simply an extension of the owner. For tax purposes, the sole proprietor completes an income statement (Schedule C), the sole proprietorship is taxed at the individual’s rate, and earnings are subject to self- employment tax. A proprietorship ceases to exist when the owner dies, retires, or goes out of business. It cannot be transferred to another person as a going concern. The owner is personally liable for all legal and financial business activities. Partnership A partnership is defined as a voluntary association of two or more persons to act as co- owners of a business for profit. All partnerships should be regulated with partnership 230 CU IDOL SELF LEARNING MATERIAL (SLM)

agreements conforming to the Uniform Partnership Act. This agreement should cover such issues as  The contribution and participation requirements of each partner  The allocation of profits and losses  Responsibilities and duties  Salaries and compensation contracts  Consequences of withdrawal, retirements, or deaths  The manner and means by which the partnership will be dissolved Partnerships are not considered separate entities for tax purposes. The partners are taxed at only one level, that of the partner. Earnings flow proportionately to each individual, and the tax treatment is then similar to that of the sole proprietor. A partnership ceases to exist on the death, retirement, or insanity of any of the partners, unless a provision for continuation has been made in the partnership agreement. There are two types of partnerships. A general partnership has only general partners and conforms to the description and limitations just listed. A limited partnership has both general and limited partners. The general partners assume responsibility for management and have unlimited liability for business activity. They must have at least a 1 percent interest in the profits and losses of the firm. The limited partners have no voice in management and are limited in liability up to their capital contribution and any specified additional debts. A limited partnership can have no more than 35 owners. The family limited partnership is a special case. These legal structures are set up to provide for continuation of a family firm when the founder retires or dies. Estate taxes on family firms frequently create a cash crisis for the survivors. Sometimes they have to sell the venture in order to pay the taxes. Careful succession planning can mitigate this problem, and the family limited partnership can play a role. Founders and family members must be careful not to run afoul of the Internal Revenue Service when using these partnerships. The IRS has stepped up scrutiny and audits since it discovered that many such partnerships are used primarily to evade taxes rather than to secure succession.34 One of the often-unanticipated problems of partnerships is that partners are agents for each other. The actions of one partner can cause unlimited personal liability for all the others. This is referred to as joint and several liabilities. C Corporation. A corporation (also called a regular C corporation for the section of the law that describes it) is a separate legal person under the laws of the state within which it is incorporated. Its life continues even after the founders or managers die or retire. The central authority resides with the board of directors, and ownership resides with the stockholders. Shares may be bought and sold freely. No investor is liable beyond his or her proportionate 231 CU IDOL SELF LEARNING MATERIAL (SLM)

capital contributions except for “insiders” in cases of securities fraud or violations of the tax code. A corporation is taxed as a separate entity according to the corporate tax code and rates. Dividends declared by the corporation are “after-tax” from the firm’s point of view, and are then taxed again at the shareholder level. This is known as the “double taxation” problem. To get around this, entrepreneurs often resort to tactics regulated by the Internal Revenue Service under the Federal Tax Code. These tactics usually revolve around issues of salary and interest expense. Interest expense is deductible from a corporation’s pre-tax profits and, therefore, reduces its tax liability. This may tempt an entrepreneur to lend the new venture money for start-up and expansion capital instead of taking an equity position. This practice is legitimate—up to a point. Under section 385 of the Federal Tax Code, a thinly capitalized company (one with a debt/equity ratio over 10:1) can have its debt reclassified as equity. Also, if the debt does not look like debt because, for example, it has conditional payment schedules instead of fixed coupon rates, it may be reclassified as equity. This means that what were tax-deductible interest payments are now double-taxed dividends. The losses of regular corporations accumulate and can be used as tax shields in future years. The losses of proprietorships and partnerships are passed along to the principals in the year they are incurred. One exception to this involves “section 1244 stock.” If this type of stock is selected in the firm’s initial legal and tax organization, the owners of the firm can deduct their losses from their regular income if the business goes bankrupt. If they selected a regular corporation, their losses are treated as capital losses at tax time. S Corporation An S corporation is a special vehicle for new small businesses that enables them to avoid the double taxation of regular corporations. To qualify for S corporation status, the firm must  Offer only one class of stock (although differences in voting rights are allowable).  Be wholly owned by U.S. citizens and derive no more than 80 percent of its income from non–U.S. sources.  Have 35 or fewer stockholders, all of whom agree to the S corporation status.  Obtain no more than 25 percent of its revenue through passive (investment) sources. Although S corporations are incorporated under state law, for federal tax purposes they resemble partnerships. Usually, stockholders receive the profits or losses of the firm proportionally. This percentage is deemed a dividend. The monies paid to shareholders are considered self-employment income but are not subject to self-employment tax. Limited Liability Company (LLC). The limited liability company is a relatively new type of business organization that shares characteristics with both corporations and partnerships. Like a corporation, an LLC is legally a separate entity that provides liability protection for its owners. However, when it comes to taxes, LLCs are treated like partnerships: The LLC does 232 CU IDOL SELF LEARNING MATERIAL (SLM)

not pay taxes itself and all profits and losses flow through directly to LLC owners and are reported on their tax returns. Although a corporation is characterized by four basic characteristics (limited liability, continuity of life, centralized management, and free transferability of interests), an LLC maintains its tax status by selecting only two of these traits when it drafts its operating agreement. In other words, if an LLC decides that it will accept limited liability and be organized under a centralized board of directors, it cannot legally continue as an entity after its owners die, and it cannot freely sell and trade its shares. An LLC receives some of the benefits of a partnership and some of the advantages of a corporation, but not all of them. Many firms, therefore, prefer to organize as partnerships or corporations. LLC owners are called “members” and may be individuals, corporations, trusts, pension plans, other LLCs, or almost any other entity. The company must file articles of organization with the secretary of state in the state where it operates and, in most states, is also required to file some sort of annual report. Still, an LLC spends less time than most corporations producing legal and tax reports. It compares the different forms of legal organization on a number of important dimensions. Private Placements under U.S. Securities Laws Whenever an investor supplies money or some item of value expecting that it will be used to generate a profit or return from the efforts of others, a security is created. All national governments regulate the issuance and redemption of securities, as do all U.S. states. In the United States, the regulatory agency that oversees this function is the Securities and Exchange Commission (SEC). Because compliance with SEC regulations is expensive and time-consuming, small firms and new firms find it burdensome to comply. In response to their concerns, regulations have been put in place providing “safe harbours” for small and new businesses. These safe harbours enable smaller firms to issue securities (with constraints and limits) without conforming to the high level of regulation that applies to large public offerings. These are called private placements. The specific regulations should be consulted directly for complete details. Experienced legal counsel should always be retained when interpreting these rules. Minor rule infractions and small deviations from the regulations can cause the firm selling unregistered securities to lose its safe harbour and be left without any protections. 13.3 INSTITUTION With the quickened pace of economic development under the impetus of the Five Year Plans, the most striking change in the Indian economy has been the initiation of an industrial revolutionist and the re-emergence of small-scale industries. Further, during the past decade, there has been a deepening as well as widening of the entrepreneurial structure as well as the small-scale preindustrial structure. Not only have the established small industries increased their installed capacity and output, but a wide range of new small industries has also come into being. During the last two decades, there is a boom of entrepreneurial activities in the 233 CU IDOL SELF LEARNING MATERIAL (SLM)

country. Thus, in the field of capital-and product goods industries, enterprises manufacturing such items as machine tools, electrical and’ engineering equipment, chemicals etc., which provide the foundation for a self (sustained growth of the economy have been set-up. Amongst the consumer goods industries, small units producing such items as -bicycles, sewing machines, plastic products, etc. are forging ahead. These far-reaching developments and the scale and scope of operation of entrepreneurs, particularly in small-scale industries, have brought to the fore the importance -of provision of administrative and institutional assistance at various levels. Over the years, financial institutions are playing a key role in providing finance and counselling to the entrepreneurs to start new ventures as well as mode diversify and even rehabilitate sick enterprises. In this context, we shall discuss the scale and scope of operation of various development banks (institutions) that have been rendering financial assistance, directly or indirectly, to entrepreneurs and their various ventures. Institutional Framework for Industry Institutional finance for -large, medium, small and tiny industries by commercial banks - the State Bank of India group, nationalized banks, private sector banks and development corporations which have been especially established to provide industrial finance. In addition, the Reserve Bank of India gives credit guarantees and the ECGC gives export guarantees to the small-scale sector. By its refinance operations, the Industrial Development Bank of India, too, plays a significant role in the promotion of the small scale-sector for it has enabled the SFCs SSIDC/SSIACS and commercial banks to extend a large quantum of financial assistance to this sector. The National Small Industries Corporation offers financial assistance is the form of its hire-purchase schemes. This apart, a host of newly cropped up institutions such as mutual funds, lease companies, financial service institutions, investment companies, merchant banks, asset management companies etc. provide financial assistance and financial services to industries. Some of them go to’ the extent of conceiving a project and see through its progress till the end. In India, long-term loans are provided for a host of financial institutions of the five all-India develop merits IDBI and SIDBI are apex banks providing refinance facilities to other institutions. Like-wise, NABARD is an apex bank for agricultural finance and Exim bank of export import trade. Then industrial development banks, special institutions, saving and investment institutions, financial service institutions and regulatory institutions. RBI, SEBI, and NSEIL are three regulatory bodies. In the cumulative sanctions by AFIs up to End-March 1998, IDBI (including resource support to other FIs)’ claimed the largest share (33.6%), fo1l9wed by ICICI (25.7%), IFCI (11.1 %), SIDBI (8.2%) and LIC I (1.4%). UTI and LIC (including resource support to other Fls) accounted for 11.6% and 4.8% respectively, followed by GIC (1.7%). Of the state-level institutions, SFCs and SIDCs claimed 6.5% and 3.5% respectively. The area of operation of development almost covers all key sectors of the economy, i.e., agriculture, small industries, rural industries medium and large industries, infrastructure, housing, export and import trade, shipping, ‘capital market 234 CU IDOL SELF LEARNING MATERIAL (SLM)

stock exchange, saving, investment, insurance, credit guarantee, financial service etc. Special institutions have cropped up to foster development a special area of activities. The financial institutions have even setup institution to rehabilitate sick enterprises. 13.4 AGENCIES In today's financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending, and investment products to individuals, businesses, or both. While some financial institutions focus on providing services and accounts for the general public, others are more likely to serve only certain consumers with more specialized offerings. To know which financial institution is most appropriate for serving a specific need, it is important to understand the difference between the types of institutions and the purposes they serve. The major categories of financial institutions include central banks, retail and commercial banks, internet banks, credit unions, savings, and loans associations, investment banks, investment companies, brokerage firms, insurance companies, and mortgage companies. Companies always seek sources of funding to grow the business. Funding, also called financing, represents an act of contributing resources to finance a program, project, or a need. Funding can be initiated for either short-term or long-term purposes. The government has established a number of financial institutions all over the country to provide finance to business organisations. These institutions are established by the central as well as state governments. They provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks. As these institutions aim at promoting the industrial development of a country, these are also called ‘development banks. In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises. This source of financing is considered suitable when large funds for longer duration are required for expansion, reorganisation and modernisation of an enterprise. 13.5 GOVERNMENT Examples of this include breaking up monopolies and regulating negative externalities like pollution. Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement. Without government intervention, firms can exploit monopoly power to pay low wages to workers and charge high prices to consumers. Government intervention can regulate monopolies and promote competition. Therefore, government intervention can promote greater equality of income, which is perceived as fairer.Since the power grows at the cost of workers' efforts and consumers' loss rather than ability of the producers, inequality is created in the market. Government 235 CU IDOL SELF LEARNING MATERIAL (SLM)

intervention promotes competition, increase economic efficiency and thus promote equitable or fairer distribution of income throughout the nation. The government tries to combat market inequities through regulation, taxation, and subsidies. Governments may also intervene in markets to promote general economic fairness. Maximizing social welfare is one of the most common and best understood reasons for government intervention. 13.5.1 Mudra Bank Schemes Micro Units Development and Refinance Agency Ltd.Mudra is an NBFC supporting development of micro enterprise sector in the country. Mudra provides refinance support to Banks / MFIs / NBFCs for lending to micro units having loan requirement up to 10 lakh. MUDRA provides refinance support to micro business under the Scheme of Pradhan Mantri MUDRA Yojana. The other products are for development support to the sector. The bouquet of offerings of Mudra is depicted below. The offerings are being targeted across the spectrum of beneficiary segments. Pradhan Mantri MUDRA Yojana (PMMY) Under the aegis of Pradhan Mantri Mudra Yojana (PMMY), MUDRA has created products/ schemes. The interventions have been named 'Shishu', 'Kishore' and 'Tarun' to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur and also provide a reference point for the next phase of graduation / growth to look forward to  Shishu - Covering loans up to50,000/-  Kishor- Covering loans above 50,000/- and up to 5 lakh  Tarun - Covering loans above 5 lakh and up to 10 lakh With an objective to promote entrepreneurship among the new generation aspiring youth, it is ensured that more focus is given to Shishu Category Units and then Kishore and Tarun categories. Within the framework and overall objective of development and growth of micro enterprises sector under Shishu, Kishore and Tarun, the products being offered by MUDRA are so designed, to meet requirements of different sectors / business activities as well as business/ entrepreneur segments. The Funding Support from MUDRA are of Two Types 1. Micro Credit Scheme (MCS) for loans up to 1 lakh finance through MFIs. 2. Refinance Scheme for Commercial Banks / Regional Rural Banks (RRBs) / Small Finance Banks / Non-Banking Financial Companies (NBFCs). Micro Credit Scheme 236 CU IDOL SELF LEARNING MATERIAL (SLM)

Micro Credit Scheme is offered mainly through Micro Finance Institutions (MFIs), who deliver the credit up to 1 lakh, for various micro enterprise / small business activities. Although the model of delivery may be through SHGs/JLGs/ Individuals, the loans are given by the MFIs to individual entrepreneurs for specific income generating micro enterprise/ small business activities. Refinance Scheme for Banks/NBFCs Different banks like Commercial Banks, Regional Rural Banks, Small Finance Banks and NBFCs are eligible to avail of refinance support from MUDRA for financing micro enterprise activities. The refinance is available for term loan and working capital loan up to an amount of 10 lakhs per unit. The eligible banks/NBFC, who comply to the requirements as notified, can avail of refinance from MUDRA for the loans given by them for eligible MUDRA compliant activities under Shishu, Kishore and Tarun categories. In order to encourage women entrepreneurs, the financing banks / MFIs may consider extending additional facilities, including interest reduction on their loan. At present, MUDRA extends a reduction of 25bps in its interest rates to MFIs / NBFCs, who are providing loans to women entrepreneurs. MUDRA Card MUDRA Card is a debit card issued against the MUDRA loan account, for working capital portion of the loan. The borrower can make use of MUDRA Card in multiple withdrawals and credits, so as to manage the working capital limit in cost-efficient manner and keep the interest burden minimum. MUDRA Card also helps in digitalization of MUDRA transactions and creating credit history for the borrower. MUDRA Card can be operated across the country for withdrawal of cash from any ATM / micro ATM and also make payment through any ‘Point of Sale’ machines. Synergies with “Make in India” Campaign Government of India has initiated several steps for encouraging enterprise creation in our country. The major one is “Make in India” movement. Make in India is a major national programme designed to facilitate investment, foster innovation, enhance skill development, project intellectual property and build best in class manufacturing infrastructure. This coupled with Start-up India and Stand-up India campaign, has created a conducive environment of enterprise creation in different scales. MUDRA, being an initiative for promoting micro enterprises, fits well with Make in India initiative for supporting these micro enterprises. Portfolio Credit Guarantee Traditional institutional financing in Indian context adopts an Asset Based Lending Approach with emphasis on collateral security. Micro units, most of the times, are unable to provide the comfort of collateral. Hence, MUDRA loans, i.e., loans up to 10 lakhs, have been made collateral free, as per the RBI norms in this regard. To mitigate the issue of collateral and to 237 CU IDOL SELF LEARNING MATERIAL (SLM)

provide comfort to the lending institutions, a Credit Guarantee Product is extended by creation of a Fund called “Credit Guarantee Fund for Micro Units”. All eligible micro-loans sanctioned since April 08, 2015 are covered under the above guarantee. The Scheme is being managed by National Credit Guarantee Trustee Company Ltd. an agency promoted by the GOI. The Guarantee product is one of the key interventions made with the objective of bringing down the cost of funds and facilitating ease of access to institutional credit for the end beneficiary to improve his creditworthiness. 13.5.2 Sidbi Schemes The idea of setting up small industries development bank of India (SIDBI), in response to a long standing domain form the small scale sector as an apex level national institution for promotion, financing and development of industries in the small scale sector, embodied an opportunity to set up proactive, responsive and forward looking institution to serve the current and emerging needs of small scale industries in the country. As a precursor to the setting up of the new institution, the small industries development fund was cleared by industrial development fund was created by industrial development bank of India (IDBI) in 1986 exclusively for refinancing, bills rediscounting and equity support to the small castle sector. The outstanding portfolio of the order of Rs. 4200 crores from IDBI was transferred to SIDBI in March 1990. SIDBI started off from a strong base; percentage of IDBI, banking of a special statute, the small industries development bank of India act of 1989, a large capital base of Rs, 450 crore, availability of experienced manpower endowed with development banking skills carved out of IDBIs professional staff and ready availability of a cast network of institutional infrastructure and enduring financial linkages with state financial corporations (SFCs), commercial banks and other institutions; all these augured well for the growth of the nascent institution.’ SIDBI ‘became operational on April 2, 1990. Loan Products Offered by SIDBI SIDBI covers mainly 6 products under Direct Loans that are discussed below. 1. SIDBI Make in India Soft Loan Fund for Micro Small and Medium Enterprises (SMILE) 2. Smile Equipment Finance (SEF) 3. Loans under Partnership with OEM 4. Working Capital (Cash Credit) 5. SIDBI Trader Finance Scheme (STFS) 6. Loan for Purchase of Equipment for Enterprise’s Development (SPEED) Let’s further have some basic understanding of these products. 1. SMILE (SIDBI Make in India Soft Loan Fund for MSME) - SMILE focuses on covering the financial requirements for new enterprises which are in the 238 CU IDOL SELF LEARNING MATERIAL (SLM)

manufacturing or in the services sector. The loan amount offered under this scheme is minimum Rs. 10 lakhs for equipment finance and Rs. 25 lakhs for other purposes. Under SIDBI’s SMILE, Machinery loan is also a loan option that can be availed under Equipment loan segment. Repayment tenure is maximum of 10 years, including moratorium period of up to 36 months. 2. SMILE Equipment Finance (SEF) - SEF has a simplified application format with competitive interest rate. MSME entities that want to purchase any new equipment or need financing for the same are covered under this loan scheme. Repayment period is of 72 months and the loan amount starts from Rs. 10 lakh. 3. Loans under Partnership with OEM (Original Equipment Manufacturer) - This loan scheme is helpful for MSMEs that can purchase machines from OEMs. Minimum 3 years of business existence is required and the repayment period is of 60 months. Loan amount offered is maximum up to Rs. 1 crore. 4. Working Capital (Cash Credit) - Working Capital is available for MSME units and offers seamless approvals, as per the loan applicant’s requirement. 5. SIDBI Trader Finance Scheme (STFS) - STFS loan scheme is for MSME Retails/Wholesalers who are in existence for at least 3 years with a satisfactory financial position. The minimum loan amount offered is Rs. 10 lakh and maximum up to Rs. 1 crore. The repayment period shall depend on the cash flow and size of business and the repayment tenure is maximum up to 60 months. 6. Loan for Purchase of Equipment for Enterprise’s Development (SPEED) - Under this loan scheme, SIDBI offers 100% financing with loan amount up to Rs. 1 crore for New to Bank and Rs. 2 crores for existing customers. Minimum 3 years of operations are required to get this loan wherein the repayment period is 2 to 5 years, including Moratorium period of 3-6 months. Borrowers can avail this loan at an interest rate of 9.25% to 10% per annum. SIDBI’s Venture Capital This loan scheme covers some major initiatives which take care of start-up funding. This includes Start-ups Life cycle along with SIDBI’s interventions, Funds of Funds for Start-ups, Aspire Fund and India Aspiration Fund.  Start-ups Lifecycle along with SIDBI’s interventions: There are new start-ups and ventures in the field of business that require the right funding from time to time. This initiative helps in providing the funds with the help of banks, NBFCs and SFBs.  Funds of Funds for Start-ups: The Government of India started this initiative to support various Alternate Investment Funds (AIFs) with the idea that it will bring some contribution to the start-up businesses. It aims to support the growth and development of the enterprises which are innovation driven. 239 CU IDOL SELF LEARNING MATERIAL (SLM)

 Aspire Fund: Aspire fund focuses on providing financial backing to start-ups who are in the initial stages of setting up manufacturing and services.  India Aspiration Fund: With the support of RBI, India Aspiration Fund was set up in order to promote equity and equity based investments in start-ups and the MSME sector. SIDBI’s Indirect Finance Under Indirect Finance, there are schemes where financial assistance is provided to banks, NBFCs and SFBs:  Assistance through Banks, NBFCs, and SFBs: Indirect Finance is provided to Banks, NBFCs, SFBs and MSMEs.  Assistance to NBFCs: NBFCs which include the loan companies as well that are registered with RBI help in providing financial assistance to enterprises in the MSME sector.  Refinance schemes: Assistance is provided to banks that are financially stable through the refinance schemes.  Assistance to small finance banks (SFBs): In order to strengthen the SFBs equity and resource base, this scheme was introduced. This scheme focuses on providing refinance support to SFBs. SIDBI’s Micro-Lending There are 3 main schemes under Micro Lending Namely Micro Lending Development Department, Responsible Finance Initiatives and Beyond Microfinance.  Micro-lending development - The mission of Micro-Lending Development is to create an institution and provide micro financial services to the people who are economically weak, including women.  Responsible finance initiatives - In the light to promote cooperation and the right lending practices in the financial sector, this loan scheme comes as a big support to the banks and other financial institutions in the country.  Beyond microfinance - This loan scheme helps the entrepreneurs to graduate from micro finance to a higher ticket size at an affordable rate. 13.5.3 NABARD Schemes The establishment of the National Bank for Agriculture and Rural Development (commonly known as ‘NABARD’ and referred as the National Bank in this book) was the outcome of the acceptance of the recommendation in “this behalf contained in the - “Interim “Report of the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development constituted by the Bank in consultation with the Central Government in 1979. 240 CU IDOL SELF LEARNING MATERIAL (SLM)

The Bill for setting up the institution was passed by the Parliament in December 1981 and the National Bank came into existence on July 12, 1982.  Refinance – short term loans Short-term loans or crop loans are offered by various financial institutions to farmers for the purpose of crop production. By providing this loan, one can assure about the food security in the country. For seasonal agricultural operations, NABARD has sanctioned short-term credit loan of amount Rs. 55,000 cr to several financial institutors in the financial year of 2017-18.  Long term loans Long-term loans are provided to financial institutions for various farm and non-farm related activities. The tenor of the long-term loan is from 18 months to maximum of 5 years. NABARD has refinanced around Rs. 65,240 cr for financial institutions in the FY 2017-18 that also include concessional refinance of Rs. 15,000 cr to Corporative banks and Regional Rural Banks (RRBs).  Rural infrastructure development fund (RIDF) Rural Infrastructure Development Fund was introduced by RBI considering the shortfall in lending to priority sector for supporting rural infrastructure projects. The primary focus of this fund is the rural infrastructure development in India and under this fund the amount disbursed was Rs. 24,993 cr in the FY 2017-18.  Long-Term Irrigation Fund (LTIF) This fund was introduced mainly to provide funding for 99 irrigation projects by initiating an amount of Rs. 20,000 cr. Post the amount sanctioning of 99 projects, there were two additional projects introduced named as ‘North Koel Reservoir Project’ from Bihar and Jharkhand and ‘Polavaram National Project’ from Andhra Pradesh.  Pradhan MantriAwaasYojana -Grameen (PMAY-G) Under this yojana, National Rural Infrastructure Development Agency (NRIDA) received an amount of Rs. 9000 cr that plans to build a pucca house, with all the basic amenities, to needy households by the year 2022.  NABARD Infrastructure Development Assistance (NIDA) NABARD Infrastructure Development Assistance (NIDA) is a special program initiated to provide credit to financially well-to-do state-owned institutions and corporations.  Warehouse Infrastructure Fund Warehouse Infrastructure Fund provides scientific warehousing infrastructure for agricultural commodities. Initial loan of the amount Rs. 5000 was provided by 241 CU IDOL SELF LEARNING MATERIAL (SLM)

NABARD in the FY 2013-14. As on 31st March 2018 the amount disbursed is Rs. 4778 cr.  Food processing fund Under this fund, Government of India has done a loan commitment of Rs. 541 cr for 11 mega food park projects, 3 food processing units and 1 integrated food park project on 31 March 2018.  Direct lending to cooperative banks NABARD has provided assistance to 58 Co-operative Commercial Banks (CCBs) and 4 State Cooperative Banks (StCBs) spread across 14 states with sanctioned amount of Rs 4,849 crore.  Credit facility to marketing federations (CFF) This federation promotes marketing of farm activities and agricultural produce; also it promotes and strengthens marketing federations and cooperatives. Amount disbursed, as on Mar 2018 was Rs. 25436 crores.  Credit to Producer Organizations & Primary Agriculture Credit Societies (PACS) NABARD launched Producer Organizations Development Fund (PODF) to support and finance Producer Organizations (POs) and Primary Agriculture Credit Societies (PACS). These organizations are formed to operate as Multi Service Centres. 13.6 SUMMARY  Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are classified based on time period, ownership and control, and their source of generation.  Examples of this include breaking up monopolies and regulating negative externalities like pollution. Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement.  The eligibility criteria prescribed for the year 2019-20 are as under: a) Complying with minimum CRAR norm of 15% (as stipulated by RBI). b) Net NPAs not exceeding 5% of net loans and advances outstanding. Further, the NPA position will be reckoned for the Bank as a whole.  Loan for Purchase of Equipment for Enterprise's Development (SPEED) SIDBI Trader Finance Scheme (STFS) SIDBI – Loan for Purchase of Equipment for Enterprise's Development PLUS (SPEED PLUS. Top-up Loan for Immediate Purposes (TULIP) SIDBI – Retail Loan Scheme for Trade Finance (RLS). 242 CU IDOL SELF LEARNING MATERIAL (SLM)

 SIDBI offers Working Capital Assistance, Term Loan Assistance, Foreign Currency Loan, Support against Receivables, equity support, Energy Saving scheme for the MSME sector, etc.  The minimum age of the applicant must be 18 years and the maximum Mudra Loan age limit is set to 65 years. Loans can be availed by non-farm income-generating businesses in trading, manufacturing and services. The requirement of credit must be ₹ 10 Lakh or lower.  Since the power grows at the cost of workers' efforts and consumers' loss rather than ability of the producers, inequality is created in the market. Government intervention promotes competition, increase economic efficiency and thus promote equitable or fairer distribution of income throughout the nation.  Institutional finance means finance raised from financial institutions other than commercial banks. These financial institutions act as an intermediary or link between savers and investors. They provide finance and financial services in areas which are outside the purview of traditional commercial banking.  While many established corporations are valued based on earnings, the value of start- ups often has to be determined based on revenue multiples. The market multiple approaches, arguably, delivers value estimates that come close to what investors are willing to pay.  How long would you be able to support yourself if you suddenly could not work? Do you earn enough to consistently dedicate a portion of your pay to savings? Are you currently earning enough to pay down debts each month? Do you regularly feel stressed or worried about paying bills?  In 2019, the failure rate of start-ups was around 90%. According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. 13.7 KEYWORDS  Funds Arrangement - Finance is a life blood for an organization. In order to survive in market and to run the operations of an industry arrangement of funds is very crucial and without funds any activity of any organization is dead.  Sources of Finance: An organization has to gather finance from different sources and every source of finance has its own pros and cons, sources of finance is way from whom an organization raise funds for its operations. 243 CU IDOL SELF LEARNING MATERIAL (SLM)

 Institutions - There are lot of finance and non-finance corporations who extend their hands in fulfilment of financial needs of an industry and even provide other types of assistance for betterment of performance of industries.  SIDBI:Small industries development bank of India which is a subsidiary of IDBI who focuses on industrialization of small industries in our country and provides varieties of assistance to small industry concerns.  NABARD: This corporation emphasizes on sustainable growth of agricultural and rural developmental operations in the villages of our country and extends all range of services. 13.8 LEARNING ACTIVITY 1. Students may visit an industry and collect the information regarding sources of finance. ___________________________________________________________________________ ______________________________________________________________ 2. Students may visit an industry and collect the information regarding the under which schemes it has got finance. ___________________________________________________________________________ ______________________________________________________________ 13.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. How do you define finance? 2. Mention any five sources of finance. 3. Give at least five names of institutions involved in industrial finance. 4. Write a brief note on government intervention in industrial finance. 5. What is new venture valuation? Long Questions 1. Explain the different sources of finance. 2. Write an essay note on new venture valuation and methods in brief. 3. Discuss about the schemes of SIDBI. 4. Describe the schemes of MUDRA. 244 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Illustrate the schemes of NABARD. 245 B. Multiple Choice Questions 1. What does SIDBI stands for? a. Small industries development bank of India b. Scale industries development bank of India c. Short industries development bank of India d. None of these 2. Which among the following is internal source of finance? a. Debentures b. Retained earnings c. Loan from bank d. Credit from suppliers 3. What is full form of MUDRA? a. Macro units’ development and restore agency limited b. Micro units’ development and refinance agency limited c. Medium units’ development and refinance agency limited d. None of these 4. When was NABARD came into force? a. June 12, 1982 b. August 12, 1982 c. July 12, 1982 d. July 14, 1982 5. When was SIDBI established? a. April 2, 1991 b. April 2, 1993 c. April 2, 1992 d. April 2, 1990 Answers 1-a, 2-b, 3-b, 4-c, 5-d CU IDOL SELF LEARNING MATERIAL (SLM)

13.10 REFERENCES Reference  Carey, C., &Naudin, A. (2006). Enterprise curriculum for creative industries students: An exploration of current attitudes and issues. Education+ Training.  Getahun, M. (2016). Capital structure and financial performance of insurance industries in Ethiopia. Global Journal of Management and Business Research.  Willoughby, K. W. (2008). How do entrepreneurial technology firms really get financed, and what difference does it make?. International Journal of Innovation and Technology Management, 5(01), 1-28. Textbooks  Hussain, A. (1989). A Textbook of Business Finance. East African Publishers.  Willoughby, K, W. (2008). How do entrepreneurial technology firms really get financed, and what difference does it make?. International Journal of Innovation and Technology Management.  JanakiramD, B&Rizwana, M. (2011).Entrepreneurship Development: Text and Cases. Excel Books India. Websites  https://www.paisabazaar.com/business-loan/sidbi/  https://www.mudra.org.in/FAQ  https://www.lendingkart.com/blog/nabard-schemes/  https://bbamantra.com/sources-of-finance/ 246 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 14: INTRAPRENEUR STRUCTURE 14.0LearningObjectives 14.1 Introduction 14.2 Meaning 14.3 Challenges 14.4 Opportunities 14.5 Summary 14.6 Keywords 14.7 Learning Activity 14.8 Unit End Questions 14.9 References 14.0 LEARNING OBJECTIVES After studying this unit, you will be able to  Explain about the nature of an Intrapreneur.  Illustrate challenges faced by an Intrapreneur.  Explain opportunities available for an Intrapreneur.  Define various concepts of an Intrapreneur. 14.1 INTRODUCTION Intrapreneurship produces something new for the corporation and represents, in its fullest manifestations, a complete break with the past. Intrapreneurship gives the man-agers of a corporation the freedom to take initiative and try new ideas. It is entrepreneurship within an existing business. It goes by a number of different names, depending upon which academic is speaking or about which company. We will use the terms corporate entrepreneurship, corporate venturing, and internal corporate ventures (ICV) interchangeably with intrapreneurship. Why do existing businesses allow this internal entrepreneurship and encourage intrapreneurial.Intrapreneurs are employees of a company who are assigned to work on a special idea or project. They are given the time and freedom to develop the project as an entrepreneur would. 247 CU IDOL SELF LEARNING MATERIAL (SLM)

However, they are not working solo. Intrapreneurs have the resources and capabilities of the firm at their disposal. Intrapreneurs and entrepreneurs have different objectives. An entrepreneur envisions creating a company from the ground up. An intrapreneur has a broader vision for an established company. This vision may involve radical changes to company traditions, processes, or products. The intrapreneur typically has directly applicable skills and experience to bring to the job. An entrepreneur starts a company as a means of providing a good or service. An intrapreneur explores policies, technologies, or applications that will help improve the performance of an existing company. Inevitably, as an intrapreneur develops the skills needed to recognize and solve important problems, that intrapreneur may turn into an entrepreneur. An intrapreneur can expect to be given the freedom and autonomy needed for such a project. Day-to-day deliverables are generally not demanded. The intrapreneur is expected to analyze and understand the trends necessary for planning the company’s future. Intrapreneurs synthesize their findings and make proposals for staying ahead of their competitors. Intrapreneurs often become a company’s executive leaders over time. They move the business forward and rise to the top with a deep understanding of the business from all levels. When intrapreneurs work at solving problems, they foster the growth of other talented intrapreneurs and integrate more new ideas for the good of the entire company. In the original \"Intra-Corporate Entrepreneurship\" whitepaper, Pinchot outlines that intrapreneurs are people who follow some of the following principles, including:  Risk something of value to themselves - such as time or financial sacrifice.  Share the reward of an intrapreneurial project between a corporation and the intrapreneur in a defined and equitable way.  Give the intrapreneur the ability to build something akin to capital.  Are given independence by the corporation, after it is earned.  Become their own \"venture capitalist\" within a corporation. Intrapreneurs are typically highly motivated individuals who have specific skill sets—as well as leadership abilities and an innovative vision that others in the corporation can get behind. Although intrapreneurs may have their \"day job\" and usual assignments on top of their new venture, they are willing to take certain risks and interpret trends in the marketplace to visualize the next steps that a company may need to innovate or stay ahead of the competition. 14.2 MEANING An intrapreneur is an employee who is tasked with developing an innovative idea or project within a company. The intrapreneur may not face the outsized risks or reap the outsized 248 CU IDOL SELF LEARNING MATERIAL (SLM)

rewards of an entrepreneur. However, the intrapreneur has access to the resources and capabilities of an established company. The word intrapreneur is coined in 1980s by a management consultant Gifford Pincho. Companies that are in great need of new innovative ideas use intrapreneurs. Intrapreneurs are employees of a company who are assigned to work on a special idea or project. The intrapreneur typically has directly applicable skills and experience to bring to the job. An entrepreneur starts a company as a means of providing a good or service. An intrapreneur seeks to improve an existing company. An intrapreneur is an employee who is given the authority and support to create a new product without having to be concerned about whether or not the product will actually become a source of revenue for the company. Unlike an entrepreneur, who faces personal risk when a product fails to produce revenue, an intrapreneur will continue to receive a salary even if the product fails to make it to production. An intrapreneur is an inside entrepreneur, or an entrepreneur within a large firm, who uses entrepreneurial skills without incurring the risks associated with those activities. Intrapreneurs are usually employees within a company who are assigned to work on a special idea or project, and they are instructed to develop the project like an entrepreneur would. Intrapreneurs usually have the resources and capabilities of the firm at their disposal. An intrapreneur is an inside entrepreneur, or an entrepreneur within a large firm, who uses entrepreneurial skills without incurring the risks associated with those activities. Example: In less than a year on the job as eBay’s chief of staff of global product management, Healey Cypher realized the company was missing out on a major business opportunity. At the time, eBay offered only e-commerce services to its clients. Despite the growth of Internet retail, the majority of consumer purchases are still made within 15 miles of a consumer’s home. Many eBay retailers told Cypher they wanted a physical retail presence as well. After consulting with eBay’s chief executive officer (CEO), Cypher assembled a team of engineers to develop tools that could be used to create an eBay presence in physical stores. The engineers created an interactive storefront that Toys'R'Us eventually installed. Over the following two years, the engineers did the same for TOMS, Sony, and Rebecca Minkoff. Cypher’s success became a new division of eBay, giving workers autonomy for solving problems and moving the company forward. Cypher became eBay's Head of Retail Innovation. He is now CEO of Boombox, a virtual events platform. 14.3 CHALLENGES There are definite reasons why large corporations have trouble staying entrepreneurial. 249 CU IDOL SELF LEARNING MATERIAL (SLM)

 The inherent nature of large organisations As a company grows larger addition layers of management are added in order to keep the organization manageable. Once the entrepreneur loses contact with workers, it is difficult to ensure that appropriate level of entrepreneurship exists within the organization. Multiple layers of management also create too many levels of approval between the innovator and the person in charge of resources. Each level has the potential to kill the project before it gets funded. As the business grows, need to control performance also grows and rules and standards become more important than entrepreneurial behavior. Another problem is the corporate culture. The guiding principles in a traditional corporate culture are – Fallow the instructions given; do not make any mistakes; do not fail; do not take initiative but wait for instructions and stay within your turf. This restrictive environment is, of course not conducive to creativity, flexibility, independence and risk taking which are essential for intrapreneur.  Need for short-run profits Apart from those characteristics inherent to large corporations that make entrepreneurship difficult is the need of most publicly held ventures to show short-run profits. Established corporations thrive on short-run profits, they are an organization’s measures of success. Corporations must also secure short- turn profits in order to keep stock prices up and attract investors. Thus, there is constant pressure on top management to devise strategics for short-run performance rather than long-run investment. Entrepreneurial ventures, on the other hand, may lose money for some time. Their key to survival is cash-flow. They need to attract money into the venture without guaranteeing the investors a sure return.  Lack of entrepreneurial talent There are very few true entrepreneurs in large organizations. Typically, they are not attracted to large organizations in the first place. Large organizations do not encourage them. They see the entrepreneur as loner rather than a team player and as an eccentric who is interested in pet projects rather than in getting corporate work done. Entrepreneurs are often viewed as cynics, as rebels, or as free spirits, who are late and do sloppy work that does not conform to standards set by the corporations. This forces the entrepreneurial person to leave the big corporations and look for alternatives.  Inappropriate compensation methods Most organizations have few methods to compensate creative employees. Wages for the employees are based on productivity by input/output measures rather than by innovation in products or processes. Even though monitory rewards may not be especially important to entrepreneurial individuals, some mechanism of rewarding innovation must be evident 250 CU IDOL SELF LEARNING MATERIAL (SLM)