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Entrepreneurs without Money (VIII). How entrepreneurs access financing?

Good afternoon to all. Sorry for not writing since July 23rd. We have been on vacations. Annual vacations in San Salvador.  As you know since we started the Volvo Ocean Race 2017-2018 last year, I did not have free time for anything. And I needed some time off.  Basically to relax. Rest and just disconnect from everything. Let me explain our vacations context. As you may know, Latin-American cities were conquered by Spain in the sixteenth century. And the legacy of Spanish conquistadores is observed in the name of the villages and cities, many of them honoring saints and religious Catholic predominant figures of the epoch. San Salvador, the place where I live, is the capital of El Salvador.

Monumento divino salvador del mundo

Monument Divino Salvador del Mundo, San Salvador.

Pedro de Alvarado, the Spaniard Conquistador of our Land,  named the new country for Jesus Christ – El Salvador (“The Savior”). The full name was “Provincia De Nuestro Señor Jesus Cristo, El Salvador Del Mundo” (“Province of our Lord Jesus Christ, the Savior of the World”), which was subsequently abbreviated to “El Salvador” (The Savior). Our capital San Salvador, celebrates the Village origin name every year, every first week of August, and the village goes on full vacation. Many activities (several parades, orchestra parties, cultural celebrations, fireworks, fairground mechanical games, religious ceremonies, museum activities,  commercial fairs, typical food special offerings, etc.) take place in the city, organized by the Mayor of San Salvador and the private sector. Look at one video from the festivities below:

But here we are again, returning back from this deserved week vacation. Today we will continue with the Entrepreneurs without Money saga. As I mentioned previously, we will continue publishing two times per week. It is our disciplined ritual contribution for you. We still have to deliver the summary of the Volvo Ocean Race 2017-2018 from the perspective of our strategy regatta. And this is coming. Stay tuned.

Let´s start with our pertinent entrepreneurship crusade. We will be showing you how the entrepreneurs are financed, through the different stages of their businesses evolution (who invests in them, what type of financing is available, where do they find the money, and why do they ask for money).              Entrepreneurs without money 23 juillet 2018

Usually, entrepreneurs start to finance their businesses with their own money. Savings, or a personal fund that has been saved for several years. In addition, family or relatives usually help them with economic support (either in kind or by lending money at zero or low-interest rates with extended grace periods). incfastestgrowingfirmsfundingsourcesAccording to the Kauffman Foundation, the sources of financing for entrepreneurs are diverse, but the majority of entrepreneurs look for debt (bank loans), personal savings, credit cards and family.  67% of entrepreneurs use their personal savings to finance their endeavors. And more than 80% of them use debt: long-term debt (52%) or short-term debt represented in credit cards (34%).

The term used to describe the entrepreneurship financing efforts is called Access to Finance. And, this term is used indistinctively at any financing institution or financial advisory firm, regardless of the financing entity size or the geographical scope. Ernst and Young has brought us the following graph about the financing landscape for entrepreneurs. Of course, this is a generalization, because each country or society has a particular ecosystem, other financing mechanisms, and regulatory platforms, which have to be considered.


SME Development and Funding Instruments. Source: Ernst & Young.

Ernst and Young shows us this simple graph that provides a complete understanding of the general funding instruments used per companies’ stage of growth or degree of entrepreneurs evolution. “An effective funding environment means that entrepreneurial companies must be able to access finance at every stage of their development”. Every stage has its own sources of financing available, and these stages are:

  1. Pre-seed phase
  2. Seed phase
  3. Start-up phase
  4. Emerging growth phase
  5. Expansion phase

In my next publication, we will proceed to understand the basics of each of these funding instruments per phase.

Finally, let us finish this post by fixing the concept of this graph. If you observe with detail, the X-axis shows us the different phases. The Y-axis shows us the level of revenues of the entrepreneur. Personally, we will respect E&Y graph to illustrate the concepts and the gaps in funding. But we would like to remark that we believe the Y-Axis has to show another financial indicator called Free Cash Flows.

Free cash flow.jpgFree cash flow represents the cash a company can generate after the required investment to maintain or expand its asset base. It is a measurement of a company’s financial performance and health. Entrepreneurs must have to see the world in terms of free cash flows. We can´t continue looking at our ventures just in terms of revenues. Revenues or Sales are not the correct measures for this graph either. Once entrepreneurs start to see their financing through the lens of free cash-flows, then our minds will begin to make the shift to set up our brains right.

We need to fix our pre-established concepts. We have to see our financing world in terms of free-cash-flows,  not in terms of revenues or net income. This is an obliged adjustment we have to abstract in our cerebral capacities if we wish to be economically viable. It is just a petit advise. With time and if you continue reading my blog over the next months, you will understand why.

From The Savior country, to be continued… bee

Source References:

Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.


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