Export import theory, practices, and procedures (second edition) part 2
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Export import theory, practices, and procedures (second edition) part 2
SECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 er from undercapitalization and/or poor management of financial resources, often during the first few years of operation. Typically, the entrepreneur either overestimates demand for the product or severely underestimates the need for capital resources and organizational skills. Undercapitalization m Export import theory, practices, and procedures (second edition) part 2 ay also be a result of the entrepreneur’s aversion to equity financing (fear of loss of control over the business) or the lender’s resistance to proviExport import theory, practices, and procedures (second edition) part 2
de capital due to the entrepreneur's lack of credit history and a comprehensive business plan (Gardner. 1994: Hutchinson. 1995).Large corporations havSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 hey have greater access to capital markets around the world. However, major changes are taking place in small/medium-sized business financing due to three important factors: technology, globalization, and deregulation, information technology enables the financial world to operate efficiently, to dec Export import theory, practices, and procedures (second edition) part 2 entralize while improving control. It also provides businesses seeking capital to choose from a vast range of financial instruments (Grimaud. 1995). GExport import theory, practices, and procedures (second edition) part 2
lobalization allows businesses to turn increasingly to international markets to raise capital. With a touch of a button, businesses will have access tSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 ss all depository institutions. The distinction between investment and commercial banking is quite blurred, and both sectors now compete in the small business financing market.it is important to properly evaluate how much capital is needed, in what increments, and over what lime period. First are th Export import theory, practices, and procedures (second edition) part 2 e initial capital needs toExport-Import Theory, Practices, and Procedures, Second Edition297298 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURESStart tExport import theory, practices, and procedures (second edition) part 2
he export-import business. Start-Up costs are not large if the exporterimporter begins as an agent (without buying for resale) and uses his or her ownSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 also be started on a part-time basis until it provides sufficient revenues to cover expenses, including the owner’s salary. However, when the business is commenced with the intention of establishing an independent company with products purchased for resale (merchant, distributor, etc.), a lot more Export import theory, practices, and procedures (second edition) part 2 capital is needed to prepare a business plan, travel, purchase, and distribute the product, and exhibit in major trade shows. Second, capital is needeExport import theory, practices, and procedures (second edition) part 2
d to finance growth and for expansion of the business. It is thus critical to anticipate capital needs during the lime of growth and expansion as wellSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 of an export-import business are determined by its stage of evolution, ownership structure, distribution channel choice, and other pertinent factors. A very small sum of money is often needed to start the business as an agent because no payments are made lor merchandise, transportation, or distribu Export import theory, practices, and procedures (second edition) part 2 tion of the product. However, initial capital needs are substantial if a person starts the business as a merchant, distributor, or trading company witExport import theory, practices, and procedures (second edition) part 2
h products available for resale. This entails payments for transportation, distribution, advertising and promotion, travel, and other expenses.CapitalSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 pansion and the capital needed to support additional marketing efforts, inventories, and accounts receivable. The ownership structure of an export-import firm tends to have an important influence on financing alternatives and little or no influence on capital needs. Studies on small business financi Export import theory, practices, and procedures (second edition) part 2 ng indicate the following salient features:•Incorporated companies are more likely to receive equity (and other nondebt) financing than debt financingExport import theory, practices, and procedures (second edition) part 2
because lenders perceive the incorporated entity as having a greater incentive to take on risky ventures due to its limited liability (Brewer et al.,SECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 This is consistent with standard theories of capital structure, which state that such businesses have little or no track record on which to base financing decisions and are often perceived as risky by lenders.Capital Requirements and Private Sources of Financing299•Firms with high growth opportuniti Export import theory, practices, and procedures (second edition) part 2 es, a volatile cash flow, and low liquidation value are more likely to finance their business with equity than debt. In firms with high growth opportuExport import theory, practices, and procedures (second edition) part 2
nities, conflicts are likely between management and shareholders over the direction and pace of growth options, and this reduces the chances of debt fSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 financing their business with debt rather than equity ( Williamson. 1988: Stulz, 1990: Schleiferand Vishny. 1992).CAP//AL SOURCES FOR EXPORT-IMPORT BUSINESSESCapital needs to start the business or to finance current operations or expansion can be obtained from different sources. Internal financing Export import theory, practices, and procedures (second edition) part 2 should be explored before resorting to external funding sources. This includes using one’s own resources for initial capital needs and then retainingExport import theory, practices, and procedures (second edition) part 2
more profits in the business or reducing accounts receivables and inventories to meet cunent obligations and finance growth and expansion. Such reductSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 viability of the business.External financing takes different forms and businesses use one or a combination of the following:•Debt or equity financing: Debt financing occurs when an export-import firm borrows money from a lender with a promise to repay (principal and interest) al some predetermined Export import theory, practices, and procedures (second edition) part 2 future dale. Equity financing involves raising money from private investors in exchange for a percentage of ownership (and sometimes participation inExport import theory, practices, and procedures (second edition) part 2
management) of the business. The major disadvantage with equity financing is the owner’s potential loss of control over the business.•Short-term, inteSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 for a period of one to five years. In long-term financing, the credit period ranges between five and twenty years.•investment, inventory, or working capital financing: I investment fl nanc-ing is money used to start the business (computer, fax machine, telephone. etc.). Inventory capital is money r Export import theory, practices, and procedures (second edition) part 2 aised to purchase products for resale. Working capital supports current operations such as rent, advertising, supplies, wages, and so on. All three coExport import theory, practices, and procedures (second edition) part 2
uld be financed bydebt or equity.300 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURESSeveral sources of funding are available to existing export-importSECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 her own resources or borrow from family or friends. It is also important to evaluate funding sources not just in terms of availability (willingness to provide funding) but also in regard to the capital’s cost and its effect on business profits, as well as any restrictions imposed by lenders on the Export import theory, practices, and procedures (second edition) part 2 operations of the business. Certain loan agreements, for example, prevent the sale of accounts receivable or equipment, or require the representationExport import theory, practices, and procedures (second edition) part 2
of lenders in the firm’s management. The following is an overview of possible sources of capital for exporl/imporl businesses.Internal SourcesThis is SECTION V:FINANCING TECHNIQUES AND VEHICLESChapter 13Capital Requirements and Private Sources of FinancingMany small and medium-sized businesses suffe Export import theory, practices, and procedures (second edition) part 2 ndered. Slarl-up businesses have limited chances of obtaining loans so self-funding becomes the only alternative. Internal sources include the following:•Money in saving accounts, certificates of deposit, and other personal accounts•Money in slocks, bonds, and money market fundsExternal SourcesFamil Export import theory, practices, and procedures (second edition) part 2 y and FriendsThis is the second-best option for raising capital for an export-import business. The money should be borrowed with a promissory note indExport import theory, practices, and procedures (second edition) part 2
icating the dale of payment and the amount of principal and interest to be paid. As long as the business pays a market interest rate, it is entitled tGọi ngay
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