Topic X Starting a New

Entrepreneurial
6ȱ Venture
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. State three forms of business;
2. Explain the three phases in the start-up;
3. Explain the seven steps and processes in the buying of existing
business ventures;
4. Examine the franchise structure, its advantages and disadvantages;
5. Discuss the legal structures for new ventures; and

X INTRODUCTION
Do you know what an entrepreneur is? According to Dictionary.com an
entrepreneur is a person who organises any enterprise especially a business,
usually with considerable initiative and risk. So are you interested to become an
entrepreneur? Do you know how to set up a new business?

In this topic, we will examine types of businesses classified into three forms
which are start-up, buying an existing business and franchising. Besides that, we
will look into legal structures for new business and sources of capital for business
activities.
74 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

6.1 TYPES OF BUSINESS

There are several ways to start a new business. The most frequently practised
ventures are classified into three forms as shown in Figure 6.1.

Figure 6.1: Three forms of starting a new business

We will discuss the three forms of starting a new business further in the next sub-
topic.

6.2 START-UP
In starting up a business, it is important that you know about:

(a) The definition of start-up;

(b) The phases in start-up; and

(c) The advantages and disadvantages of start-up.

Let us discuss this further.

6.2.1 Definition of Start-up

What is a start-up?

A start-up company is a company recently formed. It is a process where the

entrepreneur creates a completely new business starting from scratch.
ȱ
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 75

Below are a few features of a start-up company:

(a) Many entrepreneurs start up their business by themselves.

(b) Usually, entrepreneurs will use funds from their savings or by borrowing
from others.

(c) An entrepreneur who wants to start up his business usually needs to have
lots of experience, knowledge, skills and interest in the field involved.

(d) Start-up business usually involves the invention of new products or

services.

6.2.2 Phases in Start-up

Any new business goes through three phases in start-up. They are pre start-up
phase, start-up phase and post start-up phase. Now, let us look at Figure 6.2 to
see the three phases in start-up.

Figure 6.2: Phases in start-up

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6.2.3 Advantages and Disadvantages of Start-up

There are a few advantages and disadvantages of start-up. Table 6.1 indicates six
advantages and five disadvantages of start-up.

Table 6.1: The Advantages and Disadvantages of Start-up

Advantages Disadvantages

(a) The freedom of making oneÊs own (a) It requires a lot of time, money and
decisions like answering all questions additional effort to search for a
such as when, how and what type of strategic location, obtain license,
products or services. purchase machines, find new
suppliers, hire and train new worker
(b) The opportunity of using oneÊs
to perform advertising activities.
ideas and developing own image
by identifying with the customerÊs (b) In the initial stage of the business,
emotion. an entrepreneur will obtain minimal
profits or losses because of the
(c) The freedom to select the ideal
large expenditure on numerous items
location, plant, equipment, products
related to start-up.
or services, employees, suppliers
and bankers. These opportunities can (c) There is no history of business
determine the success of a business. records in which an entrepreneur can
forecast sales, expenditures and
(d) The ability to avoid any undesirable
profits.
precedents, policies, procedures and
legal commitments of existing firms. (d) There are no ready customers. An
entrepreneur needs a lot of effort to
(e) Will not affect the reputation of the
attract new customers, and sales
business because it is a new business.
expand very slowly and it will take a
(f) Ability to make changes to business. long time before the business brings
in profits.
(e) The difficulty of obtaining loans
from financial institutions because
these institutions have less confidence
in the new businesses compared with
established businesses.

ACTIVITY 6.1

You are planning to sell seafood-based crisps. Can you think of a way
to start your venture? List and compare your answer with those of your
coursemates.
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 77

EXERCISE 6.1

1. Define a start-up.
2. List the three phases in a start-up.
3. What are the critical factors that are important for new-venture
assessment?

6.3 BUYING AN EXISTING BUSINESS

In buying an existing business, it is important for you to know:

(a) The definition of buying an existing business;

(b) The steps and processes in buying an existing business;

(c) The advantages of buying an existing business; and

(d) The disadvantages of buying an existing business.

6.3.1 Definition of Buying an Existing Business

Buying an existing business is buying or acquiring either the shares of an

existing company or all of the assets of an existing company or business.
ȱ

If you are thinking about running your own business, buying a company that is
already established may be a lot less hassle than starting from scratch. According
to some business experts, buying an existing business is the safest and most
effective way for entrepreneurs to go into business. However, you will need to
put time and effort into finding the business that is right for you. By buying an
existing company, it allows the company to expand and provide the opportunity
to enter new markets.
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6.3.2 Steps and Processes in Buying an Existing

Business
In buying an existing business, there are a few steps and processes that need to
be considered. They are as follows:

(a) Personal Priority

Ideally an entrepreneur needs to consider personal factors, lifestyle and
aspirations. Before you start looking, think about what you can bring to the
business and what you would like to get back in return.

(i) Your expectations in terms of earnings  What level of profit do you

need to aim for to accommodate your needs?

(ii) Your commitment  Are you prepared to put in the hard work and
investment in the business to succeed?

(iii) Your strengths  What kind of business opportunities will give you
the chance to put your background, experience and skills to good use?

(iv) The type of business  Sole proprietorship, partnership, etc. that you
are interested in buying.

(v) The business sector you are interested in  Learn as much as you
can about your chosen industry so that you can compare different
businesses.

(b) Business Opportunities

You can find potential opportunities by reading classified advertisements,
discussing opportunities with business brokers and checking industry
sources. Resist the temptation to buy the first business that looks good; step
back, and look at it objectively.

Make an appointment with business sellers or brokers for initial

introduction to the opportunities. They should provide you with a brief
financial report, history, price and reason for sale. This will allow you to
know more about the business and how long it has been for sale.
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 79

(c) Reviewing Potential Target

The potential target must be examined closely to determine how well it
has been managed and maintained. For service businesses, talk with the
employees and even customers. Prepare a checklist of information needed,
which should include the following:

(i) Complete financial accounting of operations, including all income tax

returns and state sales tax forms for at least the past three years.

(ii) List all assets to be transferred to the new owner, including an

itemised breakdown of all inventories as of the last accounting period.

(d) Arrangement for Financing

Without proper financing, no business acquisition can move forward
successfully. There are usually several funding options. They must be
carefully scrutinised to determine the best fit for your needs. Lenders
generally require:

(i) Details of the business/sales particulars

(ii) Accounts for the last three years

(iii) Financial projections (if no accounts are available)

(iv) Details of your personal assets and liabilities

(e) Conduct Due Diligence

Due diligence is like detective work. It is the process of gathering
information by conducting investigations, searches and inquiries and is
vital to any share or asset purchased. The result of due diligence may help
you decide:

(i) Whether you proceed with an acquisition

(ii) Whether to buy shares or assets

(iii) How much to pay and how to allocate the purchase price

(iv) What matters need to be covered in the purchase agreement for your
protection
80 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

The process should guide your decision-making by providing valuable

insights into the new business and give you a good estimate of the value
at which a transaction should be undertaken and the warranties and
indemnities that should be obtained from the vendors as part of the deal.

(f) The Formal Agreement

The preparation of the formal agreement gives the parties the opportunity to
carry out the basic agreement and tie down a number of smaller matters,
which may not have been thought of by the parties in their initial negotiations.
The three basic components of the formal agreement are as follows:

(i) The Basic Elements

The first part of the agreement will usually cover the basic elements of
the agreement:

x The parties

x The assets or shares being purchased

x The purchase price

x Adjustments to the purchase price, how, when the purchase price

and adjustments will be paid

x How tax will be handled

(ii) Representations and Warranties

They are given primarily by sellers on those matters, which are
important to your purchase of the business. You first have to consider
what facts and issues are important to your decision to purchase the
business, and the amount you are willing to pay. Then, in addition to
conducting your due diligence on those matters, you will look for a
representation or warranty from the seller which proves that the
facts as represented to you are true. This is intended to protect you,
should there be other facts or information that you do not know
about, or if the seller has misled you on some important matter.
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 81

(iii) Closing Matters

This portion of the agreement will generally set out the closing date,
and what must be exchanged at the time of the closing. It will also set
out any special conditions of closing which must be met before the
sale can be finalised. The typical conditions of closing are:

x All representations and warranties given prior to closing continue

to remain true and accurate as of the date of closing.

x You will receive the purchase assets or shares free and clear of all
encumbrances, except those to which you have agreed.

x Any special licenses or consent have been received.

x All government clearance certificates or approvals have been

received.

x All other documents that form part of the transaction have been
signed and received.

x You have tendered the payment as promised in the agreement.

(g) Ready for Business

At this point, you are the proud owner of a new business. If you have
conducted yourself with due diligence and have a good purchase
agreement in place, you are well on your way to success. Nevertheless, you
may still need ongoing consultation with the prior owners. So, it is always
wise to keep a good working relationship with them. You may also require
the ongoing assistance of your team of advisors because even though the
transaction is complete, the work has just begun.
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6.3.3 Advantages of Buying an Existing Business

The advantages of buying an existing business are shown in Figure 6.3.

Figure 6.3: The advantages of buying an existing business

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6.3.4 Disadvantages of Buying an Existing Business

The disadvantages of buying an existing business are shown in Figure 6.4.

Figure 6.4: The disadvantages of buying an existing business

ACTIVITY 6.2

Ali is planning to run a „nasi kandar‰ stall in Bangsar. Dewi, who is

AliÊs friend, asks Ali to buy her existing stall. What are the benefits if he
buys DewiÊs stall as compared to setting up a new stall? Discuss.
84 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

EXERCISE 6.2

1. List five advantages and five disadvantages of a start-up.

2. Define what is meant by buying an existing business.
3. List five advantages and disadvantages of buying an existing
business.

6.4 FRANCHISING
When we talk about franchising, it is important to know:

(a) The definition of franchising;

(b) The advantages of franchising; and

(c) The disadvantages of franchising.

Let us discuss this further.

6.4.1 Definition of Franchising

A franchise is any arrangement in which the owner of a trademark, trade

name, or copyright has licensed others to use it and sell its goods or services.
ȱ

A franchisee (a purchaser of a franchise) is generally legally independent but

economically dependent on the integrated business system of the franchisor
(the seller of the franchise). A franchisee can operate as an independent
businessperson but still realise the advantages of regional or national
organisations. Some examples of these franchises are McDonaldÊs, Kentucky
Fried Chicken and Pizza Hut restaurants.
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Figure 6.5: Examples of well-known franchises

6.4.2 Advantages of Franchising

Well, do you have any idea what are the advantages of franchising? Figure 6.6
shows us a few advantages of franchising.

Figure 6.6: The advantages of franchising

Now let us look at the advantages in detail.

(a) Training and Guidance

The greatest advantage of buying a franchise, as compared to starting a
new business or buying an existing business, is that the franchisor will
provide both training and guidance to the franchisee.
86 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

(b) Brand Name Appeal

An entrepreneur who buys a well-known national franchise, especially a
large and famous one, has a good chance to succeed. The franchisorÊs name
is the drawing card for the establishment. People are often aware of the
product or services offered by a national franchise and prefer it to those
offered by lesser-known outlets.

(c) Proven Track Record

The franchisor has already proven that the operation can be successful. As
an organisation, they have been around for at least five to ten years and
must have 50 or more units. Thus, it should not be difficult to see how
thriving the operations have been. If all of the units are still in operation
and the owners report they are performing well financially, we can be
certain the franchisor has proven that the layout and location of the store,
the pricing policy, the quality of the goods or services and the overall
management are successful.

(d) Financial Assistance

A franchise is a good investment because the franchisor may be able to
help the new owner to secure the financial assistance needed to run the
operation. In fact, some franchisors have personally helped the franchisee
get started by lending money and not requiring any repayment until the
operation is running successfully. In short, buying a franchise is often an
ideal way to ensure assistance from the financial community.

6.4.3 Disadvantages of Franchising

The following are disadvantages of franchising:

(a) Franchise Fees

No one gets something for nothing. The more successful the franchisor, the
greater the franchise fees would be. A franchise of a national chain would
charge a fee from RM5,000 to RM100,000. Smaller franchisors or those who
have not had great success charge less. The prospective franchisee must
also pay for building the unit and stocking it, although the franchisor may
provide assistance in securing a bank loan, additional fee is usually tied to
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 87

gross sales. A franchisee will have to pay a continual royalty based on sales,
usually between 5 to 12 percent. Most franchisors require buyers to have
25 to 50 percent of the initial costs in cash. The rest can be borrowed
from the organisation itself. The cost of franchising involves the following
expenditure:

(i) Franchising fee

(ii) Insurance

(iii) Opening product inventory

(iv) Remodelling and leasehold improvements

(v) Utilities charges, payroll, debt services

(vi) Bookkeeping and accounting fees, legal and professional fees

(vii) State and local licenses

(viii) Permits and certificates

(b) Franchisor Control

In a large corporation, the company controls the employeeÊs activities. The
same situation exists in a small business. If an entrepreneur has a personal
business, he or she exerts control on his or her own activities. To a franchise
operator, the control is between these extremes. The franchisor generally
exercises control over the operation in order to achieve a certain degree of
uniformity. If entrepreneurs do not follow the franchisorÊs directions, they
may not have their franchise licenses renewed when the contract expires.

(c) Unfulfilled Promises

In certain cases, among lesser known franchisors, the franchisees may not
receive all that they were promised. Many franchisees find themselves
with trade names that have no drawing power. Also, many franchisees
find the promised assistance from the franchisor not forthcoming. Quite
often, instead of being able to purchase supplies more cheaply through
the franchisor, many operators find themselves paying higher prices for
supplies. If the franchisees complain, they risk having their agreement with
the franchisor terminated, revoked or not renewed.
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ACTIVITY 6.3

Is operating a franchise business more expensive compared to other

types of ventures? What is your opinion on this? Discuss during your
next tutorial session.

6.5 LEGAL STRUCTURES FOR NEW BUSINESS

Before deciding how to organise an operation, prospective entrepreneurs need
to identify the legal structures that will best suit the demands of the business.
The obligation for this is derived from changing tax laws, liability situations, the
availability of capital and the complexity of business formation. Three primary
legal forms of organisation are sole proprietorship, partnership and corporation.

Because each form has specific advantages and disadvantages, it is impossible to

recommend one form over the other. The entrepreneurÊs specific situations,
concerns and desires will dictate his choice.

6.5.1 Sole Proprietorship

A business is owned and operated by one person. The enterprise has no existence
apart from its owner. This entrepreneur has the rights over all its profits and
bears all of the liabilities for the debts and obligations of the business. The
entrepreneurs also have unlimited liabilities, which means his or her business
and personal assets stand behind the operation. If the company cannot meet its
financial obligations, the owner may be forced to sell the family car, house and
whatever assets that would satisfy the creditors.

To become a sole proprietor, a person merely needs to obtain whatever local and
state licenses necessary to begin the operations. If the proprietor should choose a
fictitious or an assumed name, he or she also must file a „certificate of assumed
business name‰ with the state. Due to its ease of formation, the sole
proprietorship is the most widely used legal form of organisation. Table 6.2
indicates the advantages and disadvantages of sole proprietorship.
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Table 6.2: The Advantages and Disadvantages of Sole Proprietorship

Advantages Disadvantages

(a) Ease of Formation (a) Unlimited Liability

Less formality and fewer restrictions The entrepreneur proprietorship
are associated with establishing a is personally responsible for all
sole proprietorship than with any business debts. This liability extends
other legal form. The proprietorship to all of the proprietorÊs assets.
needs little or no governmental
(b) Lack of Continuity
approval, and it usually is less
The enterprise may be crippled or
expensive than a partnership or
terminated if the owner becomes ill
corporations.
or dies.
(b) Sole Ownership Profits
(c) Less Available Capital
The proprietorship is not required to
Ordinarily, proprietorships have
share profits with anyone.
less available capital than other
(c) Decision-making and Control Vested types of business organisations, such
in One Owner as partnerships and corporations.
No co-owners or partners must be
(d) Relatively Difficult to Obtain Long-
consulted in the running of the
term Financing
operation.
Because the enterprise rests
(d) Flexibility exclusively on one person, it often
Management is able to respond has difficulty raising long-term
quickly to business needs in the form capital.
of day-to-day management decision.
(e) Relatively Limited Viewpoint and
(e) Relative Freedom from Governmental Experience
Control The operation depends on one
Except for requiring the necessary person and this entrepreneurÊs
licenses, very little governmental ability, training, and expertise will
interference occurs in the operation. limit its direction and scope.
(f) Freedom from Corporate Business
Taxes
Proprietorship is taxed as entrepreneur
taxpayers and not as business.

EXERCISE 6.3

1. Define briefly the three legal forms of organisation.

2. List five advantages and disadvantages of sole proprietorships.

90 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

6.5.2 Partnership
A partnership is an association of two or more persons acting as co-owners of a
business for profit. Here, each partner contributes money, labour or skills and
each share in the profits as well as losses of the business. Though not specifically
required in the uniform Partnership Act, written articles of partnership are
usually executed and are always recommended. This is because unless otherwise
agreed to in writing, the court assumes equal partnership; that is, equal sharing
of profits, losses, assets management and other aspects of the business. A
partnership agreement clearly outlines the financial and managerial
contributions of the partners and carefully delineates the roles in the partnership
relationship.

The following are examples of the type of information customarily written into
agreement:
x Name, purpose, domicile
x Duration of agreement
x Character of partners (general or limited, active or silent)
x Contribution by partners (at inception, at later date)
x Division of profits and losses
x Draws or salaries
x Right of continuity partner(s)
x Death of a partner (dissolution and wind-up)
x Release of debts
x Business expenses (method of handling)
x Separate debts
x Authority (entrepreneur partnerÊs authority on business conduct)
x Books, records and method of accounting
x Sale of partnership interest
x Arbitration
x Settlement of disputes
x Additions, alterations or modifications of partnership
x Required and prohibited acts
x Absence and disability
x Employee management
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In addition to the written articles, entrepreneurs must consider a number of

different types of partnership arrangements. Depending on the needs of the
enterprise, one or more of these may be used. It is important to remember that in a
typical partnership arrangement at least one partner must be a general partner
who is responsible for the debts of the enterprise and who has unlimited liabilities.

Table 6.3 shows the advantages and disadvantages of partnership.

Table 6.3: The Advantages and Disadvantages of Partnership

Advantages Disadvantages

(a) Ease of Formation (a) Unlimited Liability of at Least One

Legal formalities and expenses are few Partner
compared with those of complex Although some partners can have
enterprise or corporation. limited liability, at least one must be a
general partner who assumes unlimited
(b) Direct Rewards liability.
Partners are motivated to put forth their
best effort by direct sharing of profits. (b) Lack of Continuity
If any partner dies, judged to be insane
(c) Growth and Performance Facilitated or simply withdraws from the business,
In a partnership, it often is possible to
the partnership arrangement ceases.
obtain more capital and better range of
However, operations of the business
skills than in a sole proprietorship.
can continue based on the rights of
(d) Flexibility survivorship and the possible creation
A partnership often is able to respond of a new partnership by the remaining
quickly to business needs in the form of members or by the addition of new
day-to-day decisions. members.
(e) Relative Freedom from Governmental (c) Relatively Difficult to Obtain Large
Control and Regulation Sums of Capital
Very little governmental interference Most partnerships have some problems
occurs in the operation of a partnership. raising a great deal of capital, especially
when long-term financing is involved.
(f) Possible Tax Advantage Usually the collective wealth of the
Most partnerships pay taxes as partners dictates the amount of total
entrepreneurs, thus escaping the higher capital the partnership can raise,
rate assessed against corporations. especially when first starting out.
(d) Bound by the Acts of Just One Partner
A general partner can commit the
enterprise to contracts and obligations
that may prove disastrous to the
enterprise in general and to other
partners in particular.
(e) Difficulty of Disposing of Partnership
Interest
The buying out of a partner may be
difficult unless specifically arranged for
in written agreement.
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EXERCISE 6.4

State five advantages and disadvantages of partnerships.

6.5.3 Corporation

From this definition, it is clear that a corporation is a separate legal entity apart
from the entrepreneurs that own it.

In Malaysia, a business organisation is created based on the 1965 Company Act.

This Act is the law that governs all companies in Malaysia. This Act was
authorised on 15 April 1966 and revised several times in 1969, 1971, 1985, 1986
and 1987 (latest revision). This Act was based on the company law authorised in
Australia and the United Kingdom.

(a) Characteristics of a Company or Corporation

The following are characteristics of corporations:

(i) Rights and Responsibilities

A corporation has responsibility over ownership of capital and can
take legal action against others or vice versa. However, a corporation
cannot take action against the entrepreneur. The implementer agent,
the driving force behind the corporation, will take action where
necessary.

(ii) Life Span

The life span of a corporation is not dependent on its members. The
corporation will continue even if its members have died or withdrawn
from the corporation. However, the corporation can be terminated if
all its members are not interested in continuing their business.

(iii) Liabilities
The liabilities of members of a corporation are only limited to the
amount of shares they subscribed. Therefore, members are not liable
even if the corporation were to incur bankruptcy. Corporations differ
from sole proprietorship and partnership in which there is no
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 93

separation in terms of business assets and personal assets. Hence,

where debt liability is involved, creditors may claim the personal
assets of the sole proprietor or partners of the firm.

(iv) Members
A corporation must have at least two members that are permanent
residents of Malaysia. The two members involved must act as
directors and the milestone of the corporation. In a corporation, its
members will elect the board of directors, which will be responsible
for operating the corporation as well as following specified rules and
regulations as stipulated by the 1965 Corporation Act.

(b) Advantages and Disadvantages of Corporation

The advantages and disadvantages of corporations are shown in Table 6.4.

Table 6.4: The Advantages and Disadvantages of Corporation

Advantages Disadvantages
(a) Limited Liability (a) Activities Restriction
The stockholderÊs liability is limited Corporate activities are limited by the
to the entrepreneurÊs investment. charter and by various laws.
This is the most amount of money the
person can lose. (b) Lack of Representation
The majority stockholders in the
(b) Transfer of Ownership corporation outvote the minority
Ownership can be transferred stockholders.
through the sale of stock to interested
buyers. (c) Regulation
Extensive governmental regulations
(c) Unlimited Life and reports required by the state and
The Company has a life separate and federal agencies often result in a great
distinct from that of its owners and deal of paperwork and red tape.
can continue for an indefinite period.
(d) Organising Expenses
(d) Relative Ease of Securing Capital in A large amount of expenses is
Large Amounts involved in forming a corporation.
Capital can be acquired through the
issuance of bonds and shares of stock (e) Double Taxation
and through short-term loans made Income taxes are levied both on
against the assets of the business or corporate profits and on entrepreneur
personal guarantees of the major salaries and dividends.
stockholders.
(e) Increased Ability and Expertise
The corporation is able to draw on the
expertise and skills of a number of
entrepreneurs, ranging from major
stockholders to the professional
managers who are brought on board.
94 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

EXERCISE 6.5

Name five advantages and disadvantages of a corporation.

6.6 SOURCES OF CAPITAL FOR BUSINESS

ACTIVITIES
There are a variety of sources of capital for entrepreneurs that can be used to
start, expand and develop their businesses. The length of time you require will
depend on which of the many different sources of financing that best suits you
and your business. Figure 6.7 shows the sources of capital to finance your
businesses.

Figure 6.7: Sources of capital for entrepreneurial activities

(a) Personal Funds

Your personal savings is your first source of money. They may be funds
that you have saved from certain periods of time either in a savings
account, current account, money in a safe at home or cash that is readily
available when you need it. Very often, personal savings are quickly
exhausted when an entrepreneur starts a business.

(b) Family and Friends

When you exhaust your personal funds, the next place to seek money is
from family and friends. They may be friends or colleagues who are in a
position to lend you money. Although it may seem like a good idea at the
time, you can almost guarantee that they will demand their money back
when you can least afford it. Therefore, it is important to get the terms of
the loan written down clearly and precisely in order to avoid any confusion
later.
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(c) Retirement Accounts

You have saved these funds for retirement. Therefore, you can use this
money to fund the development of your business. However, the technology
development business is fraught with risks. If you fail in your business, you
may have to live more frugally in retirement.

(d) Banks and Other Financial Institutions

These institutions loan money to people who have assets that can serve as
collateral for the loan. Table 6.5 show us three types of financing: long term,
medium term and short term.

Table 6.5: Three types of Financial Institutions Financing

Types of Financial
Institutions Description
Financing
(a) Long Term This type of finance will be borrowed from external sources
over a long period, usually between five and 25 years. A
commercial mortgage or long-term loan agreement from one of
the main banks is an example of long-term financing. The
money can be used for acquiring fixed assets such as plant and
equipment.
(b) Medium Any borrowing over 2 to 7 years period can be described as
Term medium-term financing. The finance is commonly based on
an agreement between yourself and the organisation that
will be providing it. It will cover hire purchase, leasing and
loan agreements.
(c) Short Term The most typical and frequently used type of short-term finance
is bank overdraft facilities. Although the arrangement fees can
be high, you have the advantage of only paying interest on the
amount actually overdrawn. With a bank loan, on the other
hand, you have the use of a set amount of money and you will
have to pay interest whether you use the full amount or not.

(e) Government Loans

Contrary to public belief, the government is taking positive steps to
assist businesses and industry as a whole. There are millions of ringgit set
aside for the sole purpose of providing various grants and government
subsidised loans in a bid to encourage investment and development.
Government programmes are available and can reduce the effective interest
rate of bank loans and make debts available to business that would
96 X TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE

otherwise not have access to this source of funding. In general, the

government is looking to assist projects, which benefit areas of declining
industry with a high level of unemployment as well as promoting growth
and improvement in rural areas.

(f) Stock Markets

These funds are obtained by offering stock in your business to the public.
Public stock offering must comply with federal regulations. Typically, the
services of an investment banker are used. In exchange for capital
investment, most offers typically include a percentage of ownership. This in
turn would give your investor a limited amount of control within the
business and share of any profits equal to the value of the percentage of
ownership. This would probably be in the form of dividends.

EXERCISE 6.6

Give five sources of capital that an entrepreneur can use in starting up

a business or buying an existing business for new business ventures.

x There are three forms of starting a new business i.e. a start-up, buying an
existing business and franchising

x Each form has its own characteristics, advantages and disadvantages.

x Three primary legal forms for new business are sole proprietorship,
partnership and corporation.

x This topic also discussed six sources of capital for entrepreneurial activities:
 Personal funds
 Family and friends
 Retirement account
 Bank/financial institution
 Government loan
 Stock market
 TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE W 97

Corporation Partnership
Due diligence Sole proprietorship
Franchisee Start-up company
Franchising