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Entrepreneurship is the practice of embarking on a new business or reviving an existingbusiness by pooling together a bunch of resources, in order to exploit new foundopportunities.

What is Intrapreneurship?: Intrapreneurship is the practice of entrepreneurship by

employees within an organization.Difference between an entrepreneur and an intrapreneur:An entrepreneur takes substantial risk in being the owner and operator of a business withexpectations of financial profit and other rewards that the business may generate . On thecontrary, an intrapreneur is an individual employed by an organization for remuneration,which is based on the financial success of the unit he is responsible for . Intrapreneurs sharethe same traits as entrepreneurs such as conviction, zeal and insight. As the intrapreneurcontinues to expresses his ideas vigorously, it will reveal the gap between the philosophy of the organization and the employee. If the organization supports him in pursuing his ideas,he succeeds. If not, he is likely to leave the organization and set up his own business.

Example of intrapreneurship: A classic case of intrapreneurs is that of the founders of Adobe,John Warnock and Charles Geschke. They both were employees of Xerox. As employees of Xerox, they were frustrated because their new product ideas were not encouraged. They quitXerox in the early 1980s to begin their own business. Currently, Adobe has an annual turnover of over $3 billion.

Features of Intrapreneurship: Entrepreneurship involves innovation, the ability to takerisk and creativity. An entrepreneur will be able to look at things in novel ways. He willhave the capacity to take calculated risk and to accept failure as a learning point. Anintrapreneur thinks like an entrepreneur looking out for opportunities, which profit theorganization. Intrapreneurship is a novel way of making organizations more profitable

where imaginative employees entertain entrepreneurial thoughts. It is in the interest of anorganization to encourage intrapreneurs. Intrapreneurship is a significant method forcompanies to reinvent themselves and improve performance.

intraptreneurial startups were inclined to concentrate more on business-to-businessproducts while entrepreneurial startups were inclined towards consumer sales.

Another important factor that led to the choice between entrepreneurship and intrapreneurshipwas age. The study found that people who launched their own companies were in their 30s and40s. People from older and younger age groups were risk averse or felt they have noopportunities, which makes them the ideal candidates if an organization is on the look out for employees with new ideas that can be pursued.

Entrepreneurship appeals to people who possess natural traits that find start ups arousingtheir interest. Intrapreneurs appear to be those who generally would not like to getentangled in start ups but are tempted to do so for a number of reasons .


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Examples of Intrapreneurs:A lot of companies are known for their efforts towards nurturing their in-house talents to

promote innovation. The prominent among them is Skunk Works group at Lockheed Martin.This group formed in 1943 to build P-80 fighter jets . Kelly Johnson was the director of the

project, a person who gave 14 rules of intrapreneurship.

At 3M employees could spend their 15% time working on the projects they like for the betterment of the company. On the initial success of the project, 3M even funds it for further development.

Genesis Grant is another 3M intrapreneurial program which finances projects that might notend up getting funds through normal channels. Genesis Grant offers $85,000 to these innovatorsto carry forward their projects.

Robbie Bach, J Allard and teams XBOX might not have been feasible without the Microsoftsmoney and infrastructure. The project required 100s of millions and quality talent to make the

product.

Entrepreneurship Development and Business Ethics Full Marks 501. Answer any five questions. (5x2=10)i. Entrepreneurship is a process - Explain and exemplify the statement.ii. How is entrepreneurship a gap filling function?iii. Compare Innovation with Creativity.iv. State briefly the economic role of small business in society.v. Identify TWO characteristics of the service sector.vi. Why is creativity creativity considered to be a pre-requisite to innovation?vii. Differentiate between innovation and invention.

viii. Can entrepreneurs be managers? Justify your answer.2. Answer any four questions. (4x5=20)i. Who are Intrapreneurs? How are they different from traditional entrepreneur?ii. Entrepreneurship is a process of creative destruction - Analyse the statement.iii. Ascribe reasons for the recent growth of the service sector in India.iv. Outline the points of distinction between a manager and an entrepreneur.v. Articulate the qualities that an entrepreneur needs to possess.vi. Mention the advantages and disadvantages of the company form of entrepreneurship.3. Answer any two questions. (2x10=20)a) With the aid of a diagram elucidate the process of creativity as prescribed

by David Holt.

b) SSIs in India enjoyed protection since Independence but now, thegovernmental policy is towards promotion in place of protection. In thelight of the above statement.i. Outline the major problems of SSIs in India.ii. State the initiatives taken by the government to make SSIs morecompetitive in a globalised world.c) Give an account of the evolution of family ventures in India as the oldestform of entrepreneurship, and also in this context examine the role played


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by family business in India.104+65+5Student's Roll No. Subject Code: EDBE

(To be written before writing any answer)SEMESTER III - B. COM. EXAMINATION 2008ENTREPRENEURSHIP DEVELOPMENT & BUSINESS ETHICS (HONOURS)Full Marks: 50Time: 2 hrsStudents should answer in their awn words as far as practicable.GROUP A:Answer any five questions: (5x2=10)1.a) Define the term entrepreneurship,

b) What is the implication of ethics in business?

c) Mention two qualities of a successful entrepreneur.d) What is the need for the legal protection of innovation?e) What is seed capital?f) Mention two problems currently being faced by small scale industries in India.g) What are the characteristics of a family venture?h) Differentiate between invention and innovation.GROUP B:Answer any four Questions: (4x5=20)2. Corporate governance is not just corporate management. Comment3. Explain with examples the role of social factors in the analysis of the external environment of a

business.4. Can managers be entrepreneurs? Discuss.5. Make a comparative analysis of the company form of organization with the partnership form.6. Explain the concept of under-capitalisation. What are the risks involved in it? (2+3)7. What are the significant changes made in the Patents Act in India under WTO norms?GROUP C:Answer any two questions: (2x10 = 20)8.a) The corporation is responsible to a wide range of interest groups. Elaborate the statement.

b) Should priority be given to any one of these interest groups? Give your opinion . (5+5)9. Explain with a diagram the different stages in the process of creativity as prescribed by DavidHolt.10.a) Explain in detail the different methods of financing a new venture.

b) How far have venture capital funds become popular in financing new ventures in India?Discuss. (6+4)Student's Roll No.. Subject Code: EDBE(To be written before writing any answer)SEMESTER III - B. COM. EXAMINATION 2007


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ENTREPRENEURSHIP DEVELOPMENT AND BUSINESS ETHICS (HONOURS)Full Marks: 50Time: 2 hoursStudents should answer in their own words as far as practicableGROUP A

Answer ANY FIVE questions. (5x2=10)1.a) Distinguish between Intrapreneur and Entrepreneur.

b) What do you mean by intellectual property rights?c) Enumerate the features of venture capital.d) Compare 'Innovation' with 'Creativity'.e) What is Debt Financing?f) What do you understand by SWOT Analysis?g) Mention two basic ethical principles in Business.h) Is there any difference between Invention and Innovation? Comment.GROUP B

Answer ANY FOUR questions. (4x5=20)2. Discuss in brief the role of family business in India.3. Discuss briefly the economic role of small business in society.4. Explain the concept of External Environment Analysis.5. Entrepreneurship is a process. Explain.6. Analyse the concept of Corporate Governance.7. State the reasons behind the recent growth of the Service Sector in India.GROUP CAnswer ANY TWO questions. (2x10=20)8. Explain the concept of Ethics. How important is ethics in Business? Give your opinion.9. Discuss the advantages and disadvantages of the company form of entrepreneurship.10. Discuss the problems of small scale industries (SSI) in India. Suggest five remedial measurestoovercome such problems.Students Roll No.. Subject Code: EDBE(To be written before writing any answer)SEMESTER III - B. COM. EXAMINATION 2007ENTREPRENEURSHIP DEVELOPMENT AND BUSINESS ETHICS (GENERAL)Full Marks: 50Time; 2 hoursStudents should answer in their own words as far as practicable.GROUP AAnswer ANY FIVE questions. (5x2=10)1. What do you mean by creativity?2. State two characteristics of corporate entrepreneurship.3. What is meant by debt financing?4. Write a short note on corporate social responsibility.5. What do you understand by the promotion of a venture?6. Mention any two basic ethical principles in Business.7. What is innovation?


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8. Define entrepreneurship.GROUP-BAnswer ANY FOUR questions. (4 x 5 =20)9. State the characteristics of an entrepreneur.10. Write a note on external environment analysis.

11. State the importance of the Service Sector in India.12. What is the responsibility of a Business towards the consumers?13. Describe the qualities of a successful entrepreneur.14. Discuss the characteristics of family venture.GROUP CAnswer ANY TWO questions. (2x 10=20)15. What is Ethics? State the importance of ethics in Business.16. Make a comparison between the Sole Proprietorship and the Partnership form of Businessfromthe point of view of an entrepreneur.17. Discuss the different means of raising capital to start a new venture.

Entrepreneurship is the terminal stage of the

entrepreneurial process wherein after setting up a venture one looks fordiversification and growth. An entrepreneur is always in search of newchallenges. An entrepreneur is not a routine businessman he might not haveresources but he will have ideas. He is innovative and creative. He can convert


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a threat into an opportunity. Small businessmen might shut- down or changehis business if he anticipates losses but an entrepreneur will try again afteranalyzing the situation. On the other hand an entrepreneur can leave aperfectly running business to start another venture if he so desires.

Functionally all entrepreneurs are self-employed and income generatingpersons but the reverse is not true- all self- employed and income generatingpersons are not

entrepreneurs. If seen on a continuum, income generation, self-employment and entrepreneurshipcan be considered as the initial, middle and final stages of the entrepreneurial growth process.Income generating experience encourages self-employment, which in turnfacilitates graduating into entrepreneurship.

ENTREPRENEUR

An entrepreneur is a person who starts an enterprise. He searches for changeand responds to it. A number of definitions have been given of anentrepreneur-

The economists view him as a fourth factor of production

along with land labour and capital.

The sociologists feel that certain communities and cultures

promote

entrepreneurship like for example in India we say that

Gujaratis and Sindhis are very enterprising.

Still others feel that entrepreneurs are innovators who come

up with new ideas for products, markets or techniques.

To put it very simply an entrepreneur is someone who perceives opportunity,organizes resources needed for exploiting that opportunity and exploits it.

Computers, mobile phones, washing machines, ATMs, Credit Cards, CourierService, and Ready to eat Foods are all examples of entrepreneurial ideas thatgot converted into products or services.

Peter Drucker: An entrepreneur searches for change,

responds to it and exploits opportunities. Innovation is a specific tool of anentrepreneur hence an effective entrepreneur converts a source into a


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resource.

ANS 2 .

ENTREPRENEURSHIPEntrepreneurship can be described as a process of action an entrepreneur undertakes to establishhis enterprise. Entrepreneurship is a creative activity. It is the ability to create and buildsomething from practically nothing. It is a knack of sensing opportunity where others see chaos,contradiction and confusion. Entrepreneurship is the attitude of mind to seek opportunities, takecalculated risks and derive benefits by setting up a venture. It comprises of numerous activitiesinvolved in conception, creation and running an enterprise.

According to Peter Drucker Entrepreneurship is defined as a systematic innovation, whichconsists in the purposeful and organized search for changes, and it is the systematic analysis of the opportunities such changes might offer for economic and social innovation.

Entrepreneurship is a discipline with a knowledge base theory. It is an outcome of complexsocio-economic, psychological, technological, legal and other factors. It is a dynamic and risky

process. It involves a fusion of capital, technology and human talent. Entrepreneurship is equallyapplicable to big and small businesses, to economic and non- economic activities. Differententrepreneurs might have some common traits but all of them will have some different andunique features. If we just concentrate on the entrepreneurs then there will be as many models asthere are ventures and we will not be able to predict or plan, how

and where, and when these entrepreneurs will start their

ventures.

Entrepreneurship is a process. It is not a combination of some strayincidents. It is the purposeful and organized search for change, conducted after systematicanalysis of opportunities in the environment. Entrepreneurship is a philosophy- it is theway one thinks, one acts and therefore it can exist in any situation be it business orgovernment or in the field of education, science and technology or poverty alleviation or

any others .ROLE OF ENTREPRENEUR IN ECONOMIC DEVELOPMENT

The industrial health of a society depends on the level of entrepreneurship existing in it. Acountry might remain backward not because of lack of natural resources or dearth of capital [as it is many times believed] but because of lack of entrepreneurial talents or itinability to tap the latent entrepreneurial talents existing in that society.


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Entrepreneurs historically have altered the direction of national economies, industry ormarkets- Japan, Singapore, Korea, Taiwan to name a few.

Economic Development - Entrepreneurship is basically concerned with creating wealththrough production of goods and services. This results in a process of upward changewhereby the real per capita income of a country rises overtime or in other words economicdevelopment takes place. Thus entrepreneurial development is the key to economicdevelopment. In fact it is one of the most critical inputs in the economic development of aregion. It speeds up the process of activating factors of production leading to a higher rateof economic growth, dispersal of economic activities and development of backward regions.If a region is unable to throw up a sufficient number of entrepreneurs then alienentrepreneurs usually step in to provide goods and services needed by the people. Howeverthe profits earned by these entrepreneurs are usually not ploughed back but repatriated totheir place of origin. As a result development in that region cannot take place. Dr. M.M.Akhori refers to this practice as The Leech Effect. The above reiterates the importance of entrepreneurship development for fuelling economic growth of a region.

Entrepreneurship begets and also injects entrepreneurship by starting a chain reactionwhen the entrepreneur continuously tries to improve the quality of existing goods andservices and add new ones. E.g. when computers came into the market there wascontinuous improvement in the models, their functions etc. like first generation computers,personal computers, laptops, palmtops etc. Not only had this fostered the development of the software industry, computer education institutes, computer maintenance and stationeryunits etc. but also other industries like banking, railways, education, travel, films, medicaland legal transcriptions, business process outsourcing [BPOs] etc. In this manner byharnessing the entrepreneurial talent a society comes out of traditional lethargy to modernindustrial culture. India needs entrepreneurs to capitalize on new opportunities and tocreate wealth and new jobs.

Education - Towards the end of the sixties, two significant

contributions were made in the field of entrepreneurship .One was that there is a positive linkage between entrepreneurship and economic development and the other was regarding the emergenceof a strong hypothesis that entrepreneurship can be developed through planned efforts1.Consequently planners realized that absence of a strong entrepreneurial base acts as a serioushandicap in the industrial development of a region. The identification and development of firstgeneration entrepreneurs through Entrepreneurial Development Programmes is an importantstrategy.

There is a growing realization that presence of resources and

favourable government policies cannot automatically

manufacture

economic

development.


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It

is

the entrepreneurial spirit of the people, which can transform the economy of that region. Both thequantity and quality of entrepreneurs are of utmost significance for achieving the goal of economic development. The myth that entrepreneurs are born with some innate traits isfortunately no longer held. You will learn more about this in the lesson on motivation. Manyresearch studies have brought out that entrepreneurship

can

be

taught

and

learned. Entrepreneurship is a discipline and like all disciplines it has models, processes and casestudies, which can help an individual to study this subject. The necessary competencies requiredof a successful entrepreneur can be acquired through training and development. Numerouscourses in entrepreneurship are being taught all over the world in schools and colleges, seminarsand conferences are being organized and EDPs are being conducted. The thinking today is why

just create managers why not create people who can absorb managers. One can acquire the traitsand learn the skills for becoming an entrepreneur e.g. a person can learn to be achievementoriented, self- confident, perseverant etc. which are all part of the characteristics of a successfulentrepreneur.

FUNCTIONS OF ENTREPRENEUR

An entrepreneur frequently has to wear many hats. He has to perceive opportunity, plan,organize resources, and oversee production, marketing, and liaison with officials. Mostimportantly he has to innovate and bear risk. The main functions of an entrepreneur are asfollows:

1. Innovation: Innovation is one of the most important

functions of an entrepreneur according to Schumpeter. An entrepreneur uses information,knowledge and intuition to come up with new products, new methods of reducing costs of aproduct, improvement in design or function of a product, discovering new markets or newways of organization of

industry. Through innovation, an entrepreneur converts a material into a resource orcombines existing resources into new and more productive configurations. It is thecreativity of an entrepreneur that results in invention [creation of new knowledge] andinnovation [application of knowledge to create new products, services or processes.]Systematic innovation means monitoring the following for innovative opportunity:


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The unexpected success or failure or any unexpected outside event, (e.g. when the ITbubble burst the ITES sector started growing.)

Innovation based on process need [e.g. plate based

cameras, film based cameras, digital cameras]

2. Risk and uncertainty bearing: According to Hozelist an

entrepreneur performs the function of risk and uncertainty bearing. Every decisionpertaining to development of new products, adapting new technologies, opening up newmarkets involves risk. Decision-making in an environment of uncertainty requiresanticipation of risk. Profit is said to be the reward for anticipating and taking such risks.However it is pertinent to mention that the entrepreneur is not a gambler, he only takes

calculated risks. An entrepreneur develops the art of decision-making under conditions of uncertainty as a matter of survival.

3. Organization building: An entrepreneur has to organize

men, material and other resources. He has to perform the functions of planning, co-ordination and control. He has to use his leadership qualities to build a team, generateresources and solve problems. With his organizational skills an entrepreneur builds anenterprise from scratch, nurtures

it and makes it grow. His vision sows the seeds for a sound and vibrant organization andsynergies are built in he enterprise. According to Kilby in a developing country even theimitator entrepreneurs are very important and the entrepreneurial role encompasses thefollowing:

Perception of market opportunitiesGaining command over scarce resourcesPurchasing inputsMarketing the productsDealing with bureaucratsManaging human relations within the firmManaging customer and supplier relationsManaging finance

Managing productionAcquiring and overseeing assembly of the factoryIndustrial engineeringUpgrading process and productIntroducing new production techniques and products

.

Intrapreneurs, by definition, embody the same characteristics as the Entrepreneur,


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conviction, passion, and drive. If the company is supportive, the Intrapreneur succeeds.When the organization is not, the Intrapreneur usually fails or leaves to start a newcompany.

An Intrapreneur thinks like an entrepreneur seeking out opportunities, which

benefit the corporation. It was a new way of thinking, in making companiesmore productive and profitable. Visionary employees who thought likeentrepreneurs. IBM is one of the leading companies, which encouragesINTRAPRENEUR.

AnIntrapreneur is the person who focuses on innovation and creativity andwho transforms a dream or an idea into a profitable venture, by operating

within

the

organizational

environment. Thus, Intrapreneurs areInside

entrepreneurs who follow their founders

example.

The need for Intrapreneurship

Intrapreneurship is important for organisational

survival, growth, profitability and renewal

especially in larger organisations. Developing

intrapreneurs

philosophy

in

organization results in rapid growth in the number of new and sophisticatedcompetition a sense of distruct of traditional management and exodus of money of the best employees who are leaving the organization in order to starttheir own companies. It also assists in the creation of a workforce that canhelp maintain its competitiveness and promote a climate conducive to highachievement.

Final credo for companies implementing


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above), effectively dousing creativity.

ANS 3.In business and engineering , new product development (NPD) is theterm used to describe the complete process of bringing a new product or service to market. There are two parallel paths involved in the NPDprocess: one involves the idea generation, product design and detailengineering; the other involves market research and marketinganalysis . Companies typically see new product development as thefirst stage in generating and commercializing new products within the

overall strategic process of product life cycle management used tomaintain or grow their market share.

Contents

[hide ]

1 The process

2 Fuzzy Front End

3 NPD organizations

4 NPD strategies

5 Related fields

6 See also

7 References

[ edit ] The process

Idea Generation is often called the "fuzzy front end" of the NPDprocess

Ideas for new products can be obtained from basic researchusing a SWOT analysis (Strengths, Weaknesses,Opportunities & Threats), Market and consumer trends,
http://wiki/Businesshttp://wiki/Engineeringhttp://wiki/Product_(business)http://wiki/Product_designhttp://wiki/Marketinghttp://wiki/Marketinghttp://wiki/Product_life_cycle_managementhttp://w/index.php?title=New_product_development&action=edit&section=1http://wiki/SWOT_analysishttp://wiki/Engineeringhttp://wiki/Product_(business)http://wiki/Product_designhttp://wiki/Marketinghttp://wiki/Marketinghttp://wiki/Product_life_cycle_managementhttp://w/index.php?title=New_product_development&action=edit&section=1http://wiki/SWOT_analysishttp://wiki/Business


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company's R&D department, competitors, focus groups,employees, salespeople, corporate spies, trade shows, or Ethnographic discovery methods (searching for user patterns and habits) may also be used to get an insight into

new product lines or product features. Idea Generation or Brainstorming of new product, service,

or store concepts - idea generation techniques can beginwhen you have done your OPPORTUNITY ANALYSIS tosupport your ideas in the Idea Screening Phase (shownin the next development step).

Idea Screening

The object is to eliminate unsound concepts prior todevoting resources to them.

The screeners should ask several questions:

Will the customer in the target market benefit fromthe product?

What is the size and growth forecasts of the marketsegment/target market?

What is the current or expected competitive pressurefor the product idea?

What are the industry sales and market trends theproduct idea is based on?

Is it technically feasible to manufacture the product?

Will the product be profitable when manufactured anddelivered to the customer at the target price?

Concept Development and Testing

Develop the marketing and engineering details

Investigate intellectual property issues and searchpatent data bases
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Who is the target market and who is the decisionmaker in the purchasing process?

What product features must the product incorporate?

What benefits will the product provide? How will consumers react to the product?

How will the product be produced most costeffectively?

Prove feasibility through virtual computer aidedrendering, and rapid prototyping

What will it cost to produce it?

Testing the Concept by asking a sample of prospectivecustomers what they think of the idea. Usually via ChoiceModelling .

Business Analysis

Estimate likely selling price based upon competition andcustomer feedback

Estimate sales volume based upon size of market and suchtools as the Fourt-Woodlock equation

Estimate profitability and breakeven point

Beta Testing and Market Testing

Produce a physical prototype or mock-up

Test the product (and its packaging ) in typical usagesituations

Conduct focus group customer interviews or introduce attrade show

Make adjustments where necessary

Produce an initial run of the product and sell it in a testmarket area to determine customer acceptance
http://wiki/Concept_testinghttp://wiki/Choice_Modellinghttp://wiki/Choice_Modellinghttp://wiki/Fourt-Woodlock_equationhttp://wiki/Packaginghttp://wiki/Concept_testinghttp://wiki/Choice_Modellinghttp://wiki/Choice_Modellinghttp://wiki/Fourt-Woodlock_equationhttp://wiki/Packaging


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Forecast of unit volumes, revenue, and profit

These steps may be iterated as needed. Some steps may beeliminated. To reduce the time that the NPD process takes, manycompanies are completing several steps at the same time (referred toas concurrent engineering or time to market ). Most industryleaders see new product development as a proactive process whereresources are allocated to identify market changes and seize uponnew product opportunities before they occur (in contrast to a reactive strategy in which nothing is done until problems occur or thecompetitor introduces an innovation). Many industry leaders see newproduct development as an ongoing process (referred to as continuous development ) in which the entire organization is always looking for opportunities.

For the more innovative products indicated on the diagram above,great amounts of uncertainty and change may exist, which makes itdifficult or impossible to plan the complete project before starting it.In this case, a more flexible approach may be advisable.

Because the NPD process typically requires both engineering andmarketing expertise, cross-functional teams are a common way of organizing projects. The team is responsible for all aspects of theproject, from initial idea generation to final commercialization, andthey usually report to senior management (often to a vice president or Program Manager). In those industries where products are technicallycomplex, development research is typically expensive, and product lifecycles are relatively short, strategic alliances among severalorganizations helps to spread the costs, provide access to a wider skillset, and speeds the overall process.

Also, notice that because engineering and marketing expertise areusually both critical to the process, choosing an appropriate blend of

the two is important. Observe (for example, by looking at the See alsoor References sections below) that this article is slanted moretoward the marketing side. For more of an engineering slant, see theUlrich and Eppinger, Ullman references below. [1] [2]

People respond to new products in different ways. The adoption of anew technology can be analyzed using a variety of diffusion theories
http://wiki/Time_to_markethttp://wiki/Flexible_product_developmenthttp://wiki/Cross-functional_teamhttp://wiki/Diffusion_(business)http://wiki/Time_to_markethttp://wiki/Flexible_product_developmenthttp://wiki/Cross-functional_teamhttp://wiki/Diffusion_(business)


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Why do SMEs find financing a problem?

The main problem faced by SMEs when trying to obtain funding is that of uncertainty:

SMEs rarely have a long history or successful track record that potential investors can rely onin making an investment;

Larger companies (particularly those quoted on a stock exchange) are required to prepare and publish much more detailed financial information which can actually assist the finance-raising process;

Banks are particularly nervous of smaller businesses due to a perception that they represent agreater credit risk.

Because the information is not available in other ways, SMEs will have to provide it when theyseek finance. They will need to give a business plan, list of the company assets, details of theexperience of directors and managers and demonstrate how they can give providers of financesome security for amounts provided.

Prospective lenders usually banks will then make a decision based on the information provided. The terms of the loan (interest rate, term, security, repayment details) will depend onthe risk involved and the lender will also want to monitor their investment.

A common problem is often that the banks will be unwilling to increase loan funding without anincrease in the security given (which the SME owners may be unable or unwilling to provide).

A particular problem of uncertainty relates to businesses with a low asset base. These arecompanies without substantial tangible assets which can be use to provide security for lenders.

When an SME is not growing significantly, financing may not be a major problem. However, thefinancing problem becomes very important when a company is growing rapidly, for examplewhen contemplating investment in capital equipment or an acquisition.

Few growing companies are able to finance their expansion plans from cash flow alone. Theywill therefore need to consider raising finance from other external sources. In addition, managerswho are looking to buy-in to a business ("management buy-in" or "MBI") or buy-out(management buy-out" or "MBO") a business from its owners, may not have the resources toacquire the company. They will need to raise finance to achieve their objectives.

Sources of finance for SMEs

There are a number of potential sources of finance to meet the needs of small and growing businesses:

Existing shareholders and directors funds (owner financing) Overdraft financing Trade credit Equity finance Business angel financing Venture capital


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Factoring and invoice discounting Hire purchase and leasing Merchant banks (medium to longer term loans

A key consideration in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business.

The main differences between borrowed money (debt) and equity are that bankers requestinterest payments and capital repayments, and the borrowed money is usually secured on

business assets or the personal assets of shareholders and/or directors. A bank also has the power to place a business into administration or bankruptcy if it defaults on debt interest or repaymentsor its prospects decline.

In contrast, equity investors take the risk of failure like other shareholders, whilst they will benefit through participation in increasing levels of profits and on the eventual sale of their stake.However, in most circumstances venture capitalists will also require more complex investments(such as preference shares or loan stock) in additional to their equity stake.

The overall objective in raising finance for a company is to avoid exposing the business toexcessive high borrowings, but without unnecessarily diluting the share capital. This will ensurethat the financial risk of the company is kept at an optimal level.

../../default.asp Sources of FinanceVenture Capital

Venture Capital has become a vital aspect of the source of finance market over the last 10 to 15years. Venture Capital can be defined as capital contributed at an early stage in the developmentof a new enterprise, which may have a significant chance of failure but also a significant chanceof providing above average returns and especially where the provider of the capital expects tohave some influence over the direction of the enterprise. Venture Capital can be a high risk strategy.

The British Venture Capital Association (BVCA)

With 165 members, the British Venture Capital Association represents the majority of UK based private equity and Venture Capital firms. Since 1983 additional private equity invested in UK industry has amounted to 40 billion with a further 14 billion invested in the rest of Europe.Those funds have gone to assist 25,000 UK companies. In 2002 alone 5.4 billion was investedin 1,500 companies Europe wide.

See the BVCA web site for more information (http://www.bvca.co.uk).

Business Angels are informal investors who are wealthy and entrepreneurial individuals looking
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to invest in new and growing businesses in return for a share of the equity. They usually haveconsiderable experience of running businesses that they can place at the disposal of thecompanies in which they invest. Business angels invest at all stages of business development, but

predominantly in start up and early stage businesses. The majority of them tend to invest in businesses located within a reasonable distance of where they live.

The general profile of a business angel style of relationship is that:

you are looking to raise between 10,000 and as much as 600,000

you are prepared to give up some of the equity in your business and allow an investor totake a 'hands-on' role

your business has the potential to grow sufficiently over the next few years to provide the business angel with a return on investment

you can offer the business angel an 'exit' (e.g. through a trade sale or the repurchase of

their equity stake) at some future dateBusiness angels, then, are small business related investors who can have a major impact on thesuccess of a start up company.

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