Entrepreneur's Handbook
Entrepreneur's Handbook
REASONS OF FINANCING NEED FOR NEW VENTURES
Entrepreneurs need funding mainly for two reasons. The first of these is to spend in order to carry out current daily activities (such as purchasing raw materials, paying wages to employees), and the second is to make fixed investments (such as land, building, machinery, fixtures, vehicles) required by the business idea. We can classify these root causes in more detail as follows:
- a) The entrepreneur buys tangible fixed assets such as machinery, equipment, buildings, office supplies that will help to produce the product or products that constitute the basis of the business idea, or takes over an existing facility from someone else, with the financial resources he / she can reach at the beginning of the business. In other words, fixed assets are invested.
- b) Expenses related to intangible fixed assets such as patents, royalties, computer software and various rights are financed with financial resources.
- c) Commercial goods, intermediate goods or other materials to be used for the product (s) to be produced or the service to be offered are purchased. In other words, the stock item in the balance sheet is financed. Cash requirement for this expenditure item will vary depending on the harmony between inflows and outflows. In other words, if the payment date (maturity) of the price of the goods or services sold and the date of payment of the purchased goods or services are the same or close to each other, the need for funds will be less. Otherwise, if the maturity offered by the entrepreneur to the customer is more than the maturity offered to the entrepreneur, then more funds will be needed, which is called "investing in receivables" in financial language. Unfortunately, most entrepreneurs either underestimate or underestimate the working capital requirement (roughly the sum of investment in stocks and receivables) when preparing their business plan. When this is the case, it is not possible to reach the targeted production level.
- d) Financial resources may be needed to pay the employee's wages, insurance premiums, and operating expenses such as taxes, rent, etc. (Aktaş et al., 2017).
Before an entrepreneur provides financial resources, the following points should be clarified as stated in the business plan:
- a) It should be made clear why funding is needed. It is very important to determine the purpose for which the obtained funds will be used correctly. Because not every funding source may be suitable for every purpose. Choosing the appropriate financing source will help the business to be established to avoid financial difficulties.
- b) How much money is needed must be determined. If a step is taken without knowing the total amount of the financing requirement, there may be a liquidity shortage in the future. When the entrepreneur needs additional resources, he cannot find new financial resources or even if he finds it, the cost of the resource increases due to time pressure. This is the reason why most attempts fail.
- c) How long the fund will be needed for each expenditure or investment item should be well estimated. The basic approach should be that the fund used is paid with cash flows from the financed asset. For example, if stocks are financed with financial resources, it should be well calculated when the stocks will be sold and turned into cash. If the stocks turn into cash over the stipulated period, the entrepreneur will have trouble in paying his due liabilities on time.
- d) The entrepreneur's capacity to repay the funds used must be accurately determined. This issue is especially important in the use of foreign resources, ie debt. At this point, it is vital that the fund is used for a productive field. When the fund is not used in a productive field or how to repay the debt is not well planned, the entrepreneur may have trouble paying. (Aktaş, vd., 2017).
- e) If a foreign source is to be used (bank loan, etc.), the creditor (for example, if a loan is used from the bank, the bank) will ask for collateral. Especially if a bank loan is to be used, the issue of collateral should be well planned. Otherwise, no matter how good the business code is, it will not be possible to use credit from the bank. Unfortunately, insufficient coverage is often the most important obstacle to the entrepreneur. Banks act according to the 5 K principle (Character, Capacity, Capital, Provision, ie Collateral and Conditions) when lending. Compliance with these principles helps the bank recover its money. The character of the entrepreneur, namely business ethics, whether he has sufficient business capacity to compete, equity, collateral (guarantor, mortgage, etc.) and the business environment suitable for investment are also important in terms of the success or failure of the entrepreneur. As one of these 5 K, the provision that is collateral is the most important issue for credit institutions.