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Module 5

Lesson 3

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14 views25 pages

Module 5

Lesson 3

Uploaded by

jplalata
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© © All Rights Reserved
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SOURCES OF CAPITAL

Module 5
• Discuss the 5c’s of Credit
• Identify the different sources of capital for business
owners
• Choose what is the best way of acquiring funding
when starting out or expanding business
SUBTOPIC #1
THE 5C’s OF CREDIT
This is used to analyze and approve loans, as well as protect
both the lender and borrower from excessive risk. Every
lender has their own unique set, but they are all universally
based on the Five C’s of Credit. The five Cs of credit are
character, capacity, capital, collateral, and conditions.
CHARACTER

What it is: A lender’s opinion of a borrower’s general trustworthiness, credibility and


personality.

Why it matters: Banks want to lend to people who are responsible and keep commitments.

How it’s assessed: From your work experience, credit history, credentials, references,
reputation and interaction with lenders.

How to master it: “Character is something you can control and promote, but only if you
have a bank that cares about relationships,” Farris says.
CHARACTER

If you use a local or community bank, build a relationship.


Sharing good news about your business with your banker
and finding ways to promote the bank.

Make yourself someone they want to lend to.


CAPACITY/CASH FLOW

What it is: Your ability to repay the loan.

Why it matters: Lenders want to be assured that your business generates enough cash
flow to repay the loan in full.

How it’s assessed: From financial metrics and benchmarks (debt and liquidity ratios, cash
flow statements), credit score, borrowing and repayment history.

How to master it: Some online lenders may be more open to helping you finance
immediate cash flow gaps. If you’re focusing on local banks, pay down debt before you
apply. Calculate your cash flow to understand your starting point before heading to the bank.
CAPITAL

What it is: The amount of money invested by the business owner or management team.

Why it matters: Banks are more willing to lend to owners who have invested some of their
own money into the venture. It shows you have some “skin in the game.”

How it’s assessed: From the amount of money the borrower or management team has
invested in the business.

How to master it: Nearly 60% of small-business owners use personal savings to start their
business. Keep a record that shows your investment in the business.
CONDITIONS

What it is: The condition of your business — whether it is growing or faltering — as well as
what you’ll use the funds for. It also considers the state of the economy, industry trends and
how these factors might affect your ability to repay the loan.

Why it matters: To ensure that loans are repaid, banks want to lend to businesses
operating under favorable conditions. They aim to identify risks and protect themselves
accordingly.

How it’s assessed: From a review of the competitive landscape, supplier and customer
relationships, and macroeconomic and industry-specific issues.
COLLATERAL

What it is: Assets that are used to guarantee or secure a loan.

Why it matters: Collateral is a backup source if the borrower cannot repay a loan.

How it’s assessed: From hard assets such as real estate and equipment; working capital,
such as accounts receivable and inventory; and a borrower’s home that also can be counted
as collateral.
SUBTOPIC #2
VENTURE CAPITAL
AND VALUATION
An entrepreneur should choose one which meets the capital
structure that best fits their business. A business' capital
structure is the way that it is funded, either through debt
(loans) or equity (shares sold to investors) financing.
Financial backing usually includes loans, grants, or investor
funding. Some of the top ways to raise capital are through
angel investors, venture capitalists, government grants, and
small business loans.
Angel investors are generally individuals or groups who
provide capital from their personal assets to assist you with
starting your business. These types of investors are looking
for startups that have good potential for earnings.

Since they are investors, you'll be expected to present them


with a portfolio that is favorable. This differs from venture
capitalists, who are more interested in organizations that are
already doing well but need more sources of capital.
Venture capitalists (VCs) are usually groups of individuals
that provide capital through an organization they have
established. Generally, VCs like to fund companies that are
already somewhat established, and in need of more finances.
However, VCs have been known to sponsor startups that
show significant promise.
VCs are looking for high returns on their investments (your
business). This is not unusual for investors, but some VCs
may want to be involved in your business decisions after they
grant you some funding.

Some VCs have moved to more of a mentor role, assisting


you with business decisions and offering guidance as a
protective measure. Ensure you enquire about the role a VC
would like to have before you accept any funds.
A small business loan through partner lenders, while
competitive, are guaranteed and come with generally lower
rates than traditional loans.

Small business loans are not the only form of government


assistance. A source of capital often overlooked by
entrepreneurs is government grants.
The government offers grants to entrepreneurs who have
research-related businesses. The most attractive benefit of a
grant is that it is free, and you won't need to repay the
government.
Crowdfunding is a method of raising funds from individuals,
using an internet-based platform. This method depends upon
the generosity of people, and upon the exposure your
crowdfunding campaign receives.
To have a successful crowdsourcing endeavor, you must
be able to win the crowd's support. They'll want to know why
you need the money and may want a reason to contribute.
Create a reasonable monetary goal and decide on a reward
for the crowd that assists you. This could be public
recognition for donations or letting them be the first ones to
receive your product.
These are small loans designed for small businesses and
startups. What makes these loans attractive is that they are
short-term loans with low-interest rates compared to
traditional small business loans.
Sometimes referred to as invoice advances, invoice
factoring is a process where an entrepreneur agrees with a
lender to sell their invoices due, and let the lender collect
future payment by the customers.

This works by a lender purchasing your open invoices from


you for a reduced amount, then collecting the amount that is
due.
For example, if you had a sale with receivables pending for
Php11,000 you could sell it to a lender who might buy it for
Php9,000. You receive cash, and the lender receives the
Php11,000 when it is paid.

This is a source of capital you might use if you were very


much in need of capital, as you would lose Php2,000 in the
transaction.
Many companies use personal and business credit cards to
finance immediate expenses. Credit cards are convenient
when you don't have the cash to make purchases at the
moment.

If you do not have the means to make your monthly


payments, credit cards can exponentially increase your debt
with high annual percentage rates.
Books
• Money and Youth: A Guide to Financial Literacy by Gary Rabbior
• Starting a Business 101 published by Blue Beetle Books
• Danny Whatmough, 2019, Digital PR
• Denise Withers, 2017, Story Design: The Creative Way to Innovate
• Rina Plapler, 2017, Brand Intimacy: A New Paradigm in Marketing
• Wilbur D. Nesbit, 2017, First Principles of Advertising

Websites
• https://www.financialliteracy101.org/financial-literacy/
• https://www.thebalancesmb.com/discover-the-top-sources-of-capital-for-
business-owners-4049539

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