Venture Capital, Owner Financing & Trade Credit

Venture Capital Venture capital represents a type of private equity capital that used to finance firms that are at the early- stage for elaboration of new products and services or at the development stage. The investors for venture capital, known as limited partners that comprise both wealthy individuals which have financial capital and institutions that have large amounts of available capital such as private state funds, pension funds, donations, foundations, insurance companies and mutual funds. Venture capital is also referred as risk capital which normally invested in private company. It involves investments in unquoted companies with growth potential and is generally medium to long term in nature made in exchange for a stake in a company. A venture capitalist can be an individual or investment firm who makes venture investment is expected to bring their managerial and technical expertise along with capital to their investments (en.wikipedia.org 2014).

Young start-up companies with high growth potential, most often in high technology industries such biotechnology and information technology(IT) turn to venture capitalists for funding as they cannot raise capital in the public markets and unable to a secure abank loanor complete adebt offering due to lack of collateral. These companies have a limited operating history and need additional funds in developing their business. By investing in small, unproven and less mature companies, venture capitalists assume high risk in exchange for significant influence on company decision and a portion of company’ ownership (en.wikipedia.org 2014). There are three major types of venture capital which include business start-ups, business development and management buyouts. In the stage of business start-ups, venture capital organization provide capital to the firms that need funding for marketing and product development to enable them to get off the ground. While, in the stage of business development, venture capitalists organization may be willing to provide development capital for a company which wants to expand or invest in a new product or new market.

The third type of venture capital is management buyouts which is the purchase of all or part of a business from its owner by its managers. Owner Financing Finance from the owners’ personal sources is nearly always the initial source of finance for a business, whether from the owner or from family connections. At this stage because many assets are intangible, thus external financing is an unrealistic prospect and may be difficult to obtain (accaglobal.com 2014). As many small companies have weak financial base, they generally use internally generated funds in the form of personal savings or borrowing from family, relative and friend to start up a business. Trade Credit Trade credit is an important source of short-term finance, especially for small and fast growing companies. It is a kind of credit which defined as an arrangement to purchase of goods and services by one trader to another without making immediate cash or cheque payments(en.wikipedia.org 2014).

A limit is usually set, commonly called credit terms once a business enters into trade credit arrangements with its suppliers (accaglobal.com2014). For example, a customer could set cash or cheque payment to be made within 10 days from the date of the invoice and this may give customers an advantage of obtaining any early payment discount. By using trade credit, small companies are able to delay payments to suppliers for goods and services that already purchased, which is useful in managing cash flow. One of the most important benefits of using trade credit is the reduction of transaction costs which involved in paying and managing invoices between suppliers and buyers. As trade credit separates the payment cycle from the delivery cycle and pay bills periodically instead of every time that goods are delivered, it helps in reducing the transaction costs. The amount of days of the credit term is determined by the company which allowing the credit to customers and is agreed upon both parties (accaglobal.com 2014). The indirect costs of making maximum use of trade credit include the loss of early payment discount and the loss of supplier’s goodwill.

References

1. VASILESCU, LAURA GIURCA„”(2011) VENTURE CAPITAL -- OPPORTUNITIES AND LIMITS IN FINANCING THE SMES. Jul2011, Vol. 13 Issue 3, p107-110. 4p. https://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=a3144830-ff08-475c-b230-435d8bd91e06%40sessionmgr113&vid=0&hid=124 en.wikipedia.org(2014) Venture Capital [Online] Available from :https://en.wikipedia.org/wiki/Venture_capital#Types [Accessed 9th November 2014] https://en.wikipedia.org/wiki/Venture_capital#Types https://www.boundless.com/finance/textbooks/boundless-finance-textbook/obtaining-capital-methods-of-long-term-financing-14/types-of-financing-107/venture-capital-456-3808/
2. Dagogo, Daibi W(2009) THE EFFECT OF VENTURE CAPITAL FINANCING ON THE ECONOMIC VALUE ADDED PROFILE OF NIGERIAN SMEs. Vol. 5 Issue 5, p37-51. 15p. 1 Diagram, 4 Charts. https://web.a.ebscohost.com.tarcez.tarc.edu.my/ehost/pdfviewer/pdfviewer?sid=7236747c-426e-4a6a-8964-3f636959e061%40sessionmgr4003&vid=0&hid=4114 accaglobal.com(2014) Business Finance and The SME Sector [Online] Available from:https://www.accaglobal.com/my/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f9/technical-articles/business-finance.html[Assessed 9th November 2014] www.accaglobal.com/my/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f9/technical-articles/business-finance.html academia.edu(2011) Descriptive analysis on the pattern of SME financing in Malaysia [Online]Availablefrom:https://www.academia.edu/4916487/Descriptive_analysis_on_the_pattern_of_SME_financing_in_Malaysia https://www.academia.edu/4916487/
3. Descriptive_analysis_on_the_pattern_of_SME_financing_in_Malaysia accaglobal.com(2014) Trade credit is probably the easiest and most important source of short-term finance available to businesses[Online] Available from:https://www.accaglobal.com/my/en/business-finance/types-finance/trade-credit.html [Assessed 9th November 2014] https://www.accaglobal.com/my/en/business-finance/types-finance/trade-credit.html https://www.ipedr.com/vol4/11-F00028.pdf(tr) https://en.wikipedia.org/wiki/Trade_credit(2014) Trade credit [Online] Available from: https://en.wikipedia.org/wiki/Trade_credit [Assessed 9 November 2014]

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