Hello everyone. I trust that you are all enjoying principles of business and that you have began to review what you have been learning. Remember that time is very short and, before you know it, exam time will be here. Remember too that ‘the early bird catches the worm’.
Today, I take pleasure in presenting a lesson on some of the regulatory practices that persons must abide by when setting up businesses. The regulatory practices governing the establishment of businesses refer to the rules and regulations by which people who wish to establish a business should be guided. The regulations differ according to the type of business.
As far as the sole-trader type business is concerned, there are very few regulations in the setting up of the business. In fact, many sole- trader type businesses do not have any requirements to satisfy at all. A few might be required to have permits or licences in order to operate businesses. For example, those involved in handling food, say at a restaurant, are required to have a food-handlers permit. They are also required to take a medical examination to satisfy the authorities that they are in good health as, otherwise, they could spread diseases.
Visit the premises
Public-health inspectors will also visit the premises to ensure that sanitary conditions apply. For those who are selling alcohol or spirits, a licence authorising them to do so is required. Taxi operators are considered to be illegal operators if they do not have the correct transport documents, including a licence to carry passengers.
They are also given regulations regarding the number of passengers they should carry in their passenger vehicles. Hairdressers and barbers will be licensed to operate once it is proven that they are qualified and that they have hygienic places to operate in. Sand miners also need a licence to remove sand from riverbeds.
The partnership should have a minimum of two partners and a maximum of 20. In setting up a partnership, a partnership deed or deed of partnership should be drawn up. This document includes the name of the business, name and other occupation of partners and statements as to how profits and losses will be shared. The document may be drawn up by a lawyer, but it is not mandatory. The deed of partnership should be taken to the Registrar of Companies who will give permission for them to operate the partnership, if everything is in order.
If a partnership is set up and there is no partnership deed, then the partners will make reference to the British Partnership Act 1890 which indicates that all profits and losses should be shared equally.
Required to register
Private and public limited companies are required to register with the Registrar of Companies and to present the documents required. Included is the very important document, articles of incorporation, which has replaced the memorandum of association and the articles of association. A private company may be formed with one person, or may have up to 50.
For the public company, the minimum number of shareholders is seven and there is no maximum. Public companies are required to publish their accounts and may sell shares to the general public, via the stock exchange. The private company is not allowed to sell shares to the general public and, therefore, is not allowed to use the stock exchange.
In the case of professionals, for example, doctors, lawyers, accountants and so on, the requirement is that they register with their professional association. Their associations are permitted by the Government to play a major role in overseeing the professional conduct of their members.
Persons who are engaged in trades, such as electricians and plumbers, must be licensed. Some are required to sit and pass examinations which qualify them to receive their licences and practise unsupervised.
Cooperative societies should register with the Registrar of Cooperative Societies. They are required to pay a small fee. They should operate the cooperative based on the five cooperative principles.
Now let us talk a little about the various sources of venture capital for the business. You may recall that we defined venture capital as capital used to start the business or capital required for a special project within the business. The various sources of capital available to the business depend on the type of business.
The sole trader normally uses private means of raising capital. He may use his savings, his inheritances or he may borrow from friends and relatives. Financial institutions are not normally a source of capital for the sole-trader type business since they are normally very small and, as such, are not competitive when it comes to qualifying for loans. However, financial assistance may be given to them from the Small Businesses Association of Jamaica.
Pooling of money
Partnerships rely on the pooling of money by each of the partners, and they also borrow from financial institutions, such as commercial banks. Private- and public-limited companies and cooperatives get their capital mainly from selling shares. In addition, public and private companies may sell debentures. Debenture holders lend money to companies at interest. Depending on their size, they may also qualify for loans from financial institutions such as commercial banks.
I will leave you to consider how public sector businesses (Government-owned) raise capital. See you next week when we will discuss collateral and other forms of security.
Take care until then.
The significance of collateral
Today we will consider the significance of collateral in accessing capital to establish a business then move on to explain the purposes of a feasibility study.
Last week, we looked at some of the ways in which businesses can raise venture capital. Included among these ways was the borrowing of money from financial institutions. In many cases, a financial institution will not grant a loan to an applicant unless the applicant is able to supply adequate collateral.
Collateral is anything of value that can be sold quickly and the money used to cover amounts that a loan recipient has defaulted on. A number of items can be used as collateral, including:
- House titles
- Land titles
- Motor vehicle titles
- Titles for the businesses
- Investment documents (such as share certificates and debenture certificates)
- Antique furniture
- The cash value of insurance policies
- Gold, silver and other valuable jewellery
- Rare and valuable works of art
The value of collateral
The value of collateral lies in the fact that:
1. It is something that can be sold so that the financial institution can recover the outstanding money on the loan. The collateral is signed over to the financial institution. This is done when the loan applicant signs a letter of hypothecation.
2. Collateral or guaranteed loans are cheaper, in terms of rates of interest, since there is less risk for the financial institution.
3. A collateral loan is also easier to obtain than a non-collateral loan.
Some loans may not require collateral. A guarantor may be required to sign on behalf of the borrower. This person signs with the intention that if the borrower defaults on the loan, he or she will have to repay what is owing. This is another form of secured loan.
A few institutions may grant unsecured loans. In these instances, neither collateral nor a guarantee is required.
The feasibility study
Let us first find out what is meant by the term feasibility study. This is a detailed investigation to determine whether a business idea or project is technically, financially and economically viable, and if it will be successful before committing large sums of money to it. It is a screening exercise and is often described as a likelihood study.
To some, the feasibility study is a way of determining if a business idea is capable of being achieved. The question is asked: can it work and produce the level of profit necessary?
Factors relating to a feasibility study
- It is done before the business plan and usually after a series of business ideas have been discussed.
- It includes cost-benefit analysis.
- It results in the development of a feasibility report.
- Small teams of experts from marketing, production, finance and development produce this estimate.
- Past information is used to produce trends.
Purpose of feasibility study
A feasibility study:
- Determines if a business opportunity is possible, practical and viable.
- Enables one to take a realistic look at both the positive and negative aspects of the business opportunity.
- Identifies the reasons not to proceed; therefore saving time, money and heartache later on.
- Ensures that the business venture chosen will generate adequate cash flow and profits, withstand risks, remain viable in the long run and meet the objectives of the founders.
- Helps to frame and flesh out or shape specific business alternatives so they can be studied in depth.
- Outlines and narrows down the business alternatives.
- Provides quality information for decision making.
- Helps to increase investment in the business.
- Provides documentation that the business venture was thoroughly investigated.
- Helps in securing funding from lending institutions and other sources.
(a) What is collateral? (2 marks)
(b) List THREE items that can be used as collateral. (3 marks)
(c) Your friend has decided to apply for a loan to start a small business. Advise him or her of TWO advantages of seeking a collateral loan. (4 marks)
(d) Define feasibility study. (2 marks).
(e) List THREE factors relating to a feasibility study. (3 marks)
(f) Discuss THREE reasons why a firm might produce a feasibility study. (6 marks)
Total marks: 20
See you all next week. Keep safe.