BUS613: Advanced International Business

2.2.1 Personal Sources of Funding, Loan Finance, Equity Finance and Trade Credit

Research shows that it is common for nascent entrepreneurs to use money from personal savings and credit cards almost exclusively when they first conceive a business idea, and that it is usually not until after the new venture grows, that they will acquire debt and equity capitals. Hence, depending on how mature the pop-up retail operation is, an entrepreneur can decide on their financing approach.

Loan finance is "money borrowed from a finance company, such as a bank, and repaid over a period of time at either fixed or variable rates of interests". The lender usually requires some forms of securities against personal or business assets. Few entrepreneurs have adequate personal funds to sustain the operation of a pop-up shop, so they must rely on some form of financing to support the business on a long-term basis. Loan finance allow the entrepreneurs to keep full ownership of their business but the debt capital must be carried as a liability on the balance sheet as the borrowed principal and interest must be paid back based on the set schedule.

Loan Finance: money borrowed from a finance company, such as a bank, and repaid over a period of time at either fixed or variable rates of interest.

Equity finance is the personal investment in a business by the owners. The most common source of equity capital is the entrepreneur's own savings and credit cards since they're the least expensive sources of funds and many entrepreneurs see the benefits of being self-sufficient. In addition, investors and lenders expect entrepreneurs to contribute start-up funds to their business to show that they are willing to take the risk and not borrow excessively in the beginning, which puts greater pressure on cash flow. Some experts suggest that, generally speaking, an entrepreneur should be prepared to contribute 10%-25% of the required cash before looking for outside financing. Bringing in outside funds in the form of equity capital means that a certain percentage of the business ownership will be surrendered. Entrepreneurs often turn to their family members and friends as a second source of funds before trying to attract investments from private investors or venture capital companies.

Equity Finance: the personal investment in a business by the owners.

Business angels are those individuals who are prepared to invest money in a business. The differences between business angels and venture capital companies involve the size of the investment and risk averse tendency. Business angels usually provide a smaller amount of funding, but are more willing to risk a new business adventure.

Trade credit is a deferred payment term (also called supply-side financing) negotiated with suppliers. It can help offset the cost of the merchandise during the start-up period by paying the vendors in 30, 60 or 90 days, interest free.

Trade Credit: a seller's short-term loan to the buyer, allowing the buyer to delay payment of an invoice.

2.2.2 Applying to Government Programs

Accessing external funding resources is critical for the growth of small businesses, but it's challenging to obtain them. As a result, many governmental programs have been developed and implemented to facilitate access to financing and they usually take the form of a guarantee or loss-sharing program.

One such program is the Canada Small Business Financing Program (CSBFP) which was launched in 1999 with the objective to improve access to financing for small and medium size enterprises (SMEs). In addition, the Canada Business Network has a wealth of information regarding grants, contributions, subsidies and loan guarantees provided by government departments and agencies as well as other financing sources, such as private sector financing, financing from non-government organizations and crowdfunding sources.

Each program and funding source typically has its unique structure and funding model. Hence, entrepreneurs interested in obtaining financing should review the program information before approaching the funding program or seek assistance from a small business consultant for guidance.