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MGT602 - Entrepreneurship - Lecture Handout 32

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  1. To identify the types of financing available.
  2. To understand the role of commercial banks in financing new ventures, the types of loans available, and bank lending decisions.
  3. To discuss Small Business Administrative (SBA) loans.
  4. To understand the aspects of research and development limited partnerships.
  5. To discuss government grants, particularly small business innovation research grants.
  6. To understand the role of private placement as a source of funds.


Different sources of capital are generally used at different times in the life of the venture.

Debt or Equity Financing

  1. Debt financing involves an interest-bearing instrument, usually a loan, the payment of which is only indirectly related to sales and profits.
    • Debt financing (also called asset-based financing) requires some asset be used as collateral.
    • The entrepreneur has to pay back the amount of funds borrowed plus a fee, expressed in terms of interest.
    • Short-term money is used to provide working capital.
    • Long term debt (lasting more than a year) is frequently used to purchase some asset, with part of the value of the asset being used as collateral.
    • Debt has the advantage of letting the entrepreneur retain a large ownership position and have greater return on equity.
    • If the debt is too great payments become difficult to make and growth is inhibited.
  2. Equity financing offers the investor some form of ownership position in the venture.
    • The investor shares in the profits of the venture.
    • Key factors in choosing the type of financing are availability of funds, assets of the venture, and prevailing interest rates.
    • Usually a combination of debt and equity financing is used.
  3. In a market economy all ventures will have some equity, as all are owned by someone.

MGT604 - Management of Financial Institutions - Lecture Handout 25

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Related Content: MGT604 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Management of Financial Institutions

Mutual Funds

Cost of Ownership

1. Management Fee

All mutual funds, including no-load funds, have certain fixed expenses that are built into their per share net asset value. These expenses are the actual costs of doing business.

They are deducted from the assets of the fund. It is advisable to check the prospectus to determine the percentage of the fund's total net assets that is paid out for expenses.

Additionally, shareholder services provided by the fund, investment adviser's fees, bank custodian fees, and fund underwriter costs also come out of the fund's assets. These charges vary from fund to fund; however, they are clearly spelled out in the prospectus.

On a per-share basis, however, management expenses are usually quite small, because they are spread over the tens of thousands, or the millions, of shareholders in the fund.

The formula for determining the cost of a fund's management expenses is simple: From the current value of the fund's total assets subtract liabilities and expenses, and divide the result by the number of outstanding shares. The fund's prospectus and /or annual reports often provide this data. Management fees and expenses are usually expressed as a ratio of expenses paid out to total assets. Generally, the prospectus will show these expense ratios.

Read more: MGT604 - Management of Financial Institutions - Lecture Handout 25