Question

Describe the financial challenges at each stage of the lifecycle. Explain how entrepreneurs can overcome these challenges with different sources of finance at each stage. Support your answer with examples (600 words)

Answer 1

Financial Challenges:

Any entrepreneur or any entity typically undergo the below financial challenges during its different phases of life.

- Capital Sourcing

- Operational Financing

- Investment Financing

Capital Sourcing:

- This is the preliminary and most key challenge any entrepreneur shall undergo. This is generally sourced to initiate the activities of the firm.

- This fund sourcing is scouted during the initial phase of the firm where the business is yet to start and with the unknown potential of the business.

- The entrepreneur has to critically work on to establish the potential strength and expected returns from the business, before the funding partners.

- Generally capital sourcing shall happen either through Equity financing or through Long Term Debt financing.

- Both Equity as well as Debt financing have their respective pros and cons based on the factors of ownership dilution, periodic repayments, cost of capital etc.

- Depending on the requirements and the suitability of funding approach, the entrepreneur must choose either of these options or a proportionate mix of these options to benefit the business, in the long term.

- The main challenge generally faced in this is the due-diligence done on the business/entrepreneur to assess the potential and risk factors. The entrepreneur/business need to portray their abilities in all aspects to gain investor confidence.

Operational Financing:

- This financing requirement shall come once the business is in progress and is either in the phase of expansion of the market share or in the struggle of working capital requirements.

- This funding requirement is for shortterm and should be readily available to support the business instantly. Any delay in this funding shall have significant impact on the working capital fluctuations and thus the operational performance of the company.

- Since this funding is required to maintain and monitor the liquidity of the company, the soucing should be in multiple ways.

- Nowadays the short term financing has taken multiple forms with multiple products, like working capital demand loans, Non-Fund based facilities, Letters of Credit, Bill discounting, Factoring, Forfeiting, Channel financing, etc.

- Depending on the business requirements, the company should keep these options open and shall need to use as and when necessary to keep liquidity.

- The challenges faced in this are that the monitoring of funding and fund movement is very critical as any single default shall significantly impact the credit score of the company.

- The drawing power of the company need to be regularly monitored to assess the appetite of borrowing.

- Sufficient collaterals need to be provided to the financial institutions for availing these facilities.

Investment Financing:

- This stage is two-fold:

o Investment of excess funds

o Funding for long term business plans / capacity expansions / strategic investments.

- Investment of excess funds:

o Any idle cash in the business is not a good parameter from the financial health perspective and hence it is always recommended to monitor the liquidity and invest excess funds.

o Investment of excess funds requires a thoughtful strategy on the requirement and the investment gap. Based on this, the investment need to be made in to short term or medium term or long term investments.

o Also, the risk profile and acceptability of the business shall also need to be evaluated to determine of investment in to various investment products like equity instruments, mutual funds, bonds, deposits, other businesses etc.

o The entrepreneur needs to display enough caution interms of choosing the investment such that the original value should not get depleted.

- Funding for Long term or strategic plans:

o These funding requirements generally come at the phase of business for expansion, capacity improvements, strategic business acquisitions;

o Generally, the company prefers to choose either equity, debentures or long term bonds for raising funds for these requirements.

o This is a growth phase of the company and hence this is the time for the entrepreneur to grab possible benefit from the funding with low cost of capital.