Class 7

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Class 7

• Turn in Case I!
• Discuss Assignment 5
• Financing
• Equity
• Debt
• Excel Template
• Entering financing information

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Sources of Debt Equity Financing
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The Secrets to Successful Financing

• 1. Choosing the right sources of capital is a
  decision that will influence a company for a
  lifetime.
• 2. The money is out there the key is knowing
  where to look.
• 3. Creativity counts. Entrepreneurs have to be
  as creative in their searches for capital as they
  are in developing their business ideas.

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The Secrets to Successful Financing

• 4. The World Wide Web puts at entrepreneurs
  fingertips vast resources of information that can
  lead to financing.
• 5. Be thoroughly prepared before approaching
  lenders and investors.
• 6. Entrepreneurs should not underestimate the
  importance of making sure that the chemistry
  between themselves, their companies, and their
  funding sources is a good one.

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Three Types of Capital
Capital is any form of wealth employed to produce
more wealth for a firm.

• Fixed - used to purchase the the permanent or
  fixed assets of the business (e.g. buildings,
  land, equipment, etc.).
• Working - used to support the small company's
  normal short-term operations (e.g. buy inventory,
  pay bills, wages, or salaries, etc.).
• Growth - used to help the small business expand
  or change its primary direction.

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Equity Capital

• Represents the personal investment of the
  owner(s) in the business.
• Is called risk capital because investors assume
  the risk of losing their money if the business
  fails.
• Does not have to be repaid with interest like a
  loan does.
• Means that an entrepreneur must give up some
  ownership in the company to outside investors.

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Sources of Equity Financing

• Personal savings
• Friends and family members
• Angels
• Partners
• Corporations
• Venture capital companies
• Public stock sale

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Personal Savings

• The first place an entrepreneur should look for
  money.
• The most common source of equity capital for
  starting a business.
• Outside investors and lenders expect the
  entrepreneur to put some of her own capital into
  the business before investing theirs.

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Friends and Family Members

• After emptying her own pockets, an entrepreneur
  should turn to those most likely to invest in the
  business - friends and family members.
• Survey of Inc. 500 companies 30 of business
  founders relied on family and friends for
  capital.
• Careful!!! Inherent dangers lurk in
  family/friendly business deals, especially those
  that flop.

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Friends and Family Members

• Guidelines for Family and Friendship Financing
  Deals
• Consider the impact of the investment on everyone
  involved.
• Keep the arrangement strictly business.
• Settle the details up front.
• Create a written contract.
• Treat the money as bridge financing.
• Develop a payment schedule that suits both
  parties.

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Angels

• Angels - private investors who back emerging
  entrepreneurial companies with their own money.
• Fastest growing segment of the small business
  capital market.
• Some 400,000 angels invest 50 billion a year in
  50,000 small companies.

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Angels

• Most likely to finance deals in the 10,000 to 2
  million range.
• Key finding them!
• Angels almost always invest their money locally
  and can be found through networking.
• Another avenue Angel capital networks on the
  World Wide Web.

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Angels

• Typical angel accepts 30 of the proposals
  presented to him and has invested an average of
  131,000 in 3.5 businesses.
• An excellent source of patient money for
  investors needing relatively small amounts of
  capital often less than 500,000.

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Corporate Venture Capital

• About 900 large corporations across the globe
  invest in start-up companies.
• 30 of all venture capital investments come from
  corporations.
• Capital infusions are just one benefit corporate
  partners may share marketing and technical
  expertise.

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Venture Capital Companies

• More than 3,000 venture capital firms operate
  across the U.S.
• Most venture capitalists seek investments in the
  3,000,000 to 10,00,000 range in companies with
  high-growth and high-profit potential.
• Business plans are subjected to an extremely
  rigorous review - less than 1 accepted.

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Venture Capital Companies

• Usually take an active role in managing the
  companies in which they invest.
• Focus their investments in specific industries
  with which they are familiar.
• Invest in a company across several stages. Most
  common stages
• Early phase of development
• Rapid growth phase

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What Do Venture CapitalCompanies Look For?

• Competent management
• Competitive edge
• Growth industry
• Viable exit strategy
• Intangibles

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Web Sites

• PriceWaterhouseCoopers Money Tree
  Surveyhttp//www.pwcmoneytree.com/
• Piedmont Angel NetworkPan web-site
• ACE-Nethttp//acenet.csusb.edu/

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Debt Financing

• Must be repaid with interest.
• Is carried as a liability on the company's
  balance sheet.
• Can be just as difficult to secure as equity
  financing, even though sources of debt financing
  are more numerous.
• Can be expensive, especially for small companies,
  because of the risk/return tradeoff.

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Consider Borrowing Money to

• Increase your work force and/or inventory to
  boost sales
• Gain market share
• Purchase new equipment
• Refinance existing debt
• Take advantage of cash discounts

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Consider Borrowing Money to

• Buy the building in which your business is
  located
• Establish a relationship with a lender
• Retire debt held by a non-relationship creditor
• Deal with a downturn in business

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Sources of Debt Capital

• Commercial banks

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Commercial Banks

• Lenders of first resort for small business owners
• 80 of all loans to existing businesses come from
  banks
• Focus on a companys ability to generate positive
  cash flow when evaluating loan proposals

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Commercial Banks
...the heart of the financial market for small
businesses!

• Short-term loans Commercial banks specialty
• Commercial loans
• Lines of credit
• Floor planning

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Commercial Banks
...the heart of the financial market for small
businesses!

• Intermediate and long term loans
• Term loans
• Installment loans
• Discounted installment contracts
• Character loans

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Sources of Debt Capital

• Commercial banks

• Asset-based lenders

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Asset-Based Borrowing

• Discounting accounts receivable

• Inventory financing

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Sources of Debt Capital

• Commercial banks

• Asset-based lenders

• Trade credit
• Equipment suppliers
• Commercial finance companies
• Saving and loan associations

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Sources of Debt Capital
(Continued)

• Stock brokerage houses
• Insurance companies
• Credit unions
• Bonds
• Private placements
• Small Business Investment Companies (SBICs)

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Small Business Investment Companies (SBICs)

• 396 SBICs operate in the U.S.
• Use combination of private capital and federally
  guaranteed debt to provide long-term capital to
  small companies.
• Since 1960, SBICs have provided more than 26.5
  billion in financing to some 90,000 small
  companies.

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Sources of Debt Capital
(Continued)

• Stock brokerage houses
• Insurance companies
• Credit unions
• Bonds
• Private placements
• Small Business Investment Companies (SBICs)

• Small Business Lending Companies (SBLCs)

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Sources of Debt Capital
(Continued)
Federally Sponsored Programs

• Economic Development Administration (EDA)
• Department of Housing and Urban Development (HUD)
• U.S. Department of Agricultures Rural
  Business-Cooperative Service

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Sources of Debt Capital
(Continued)
Federally Sponsored Programs

• Local Development Companies (LDCs)
• Small Business Innovation Research (SBIR)
• Small Business Technology Transfer programs
• Small Business Administration (SBA)

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Small Business Administration Loan Programs

• Low Doc Loan Program
• SBAExpress Program
• 7(A) Loan Guaranty Program the most popular SBA
  loan program

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Small Business Administration Loan Programs

• Low Doc Loan Program
• SBAExpress Program
• 7(A) Loan Guaranty Program the most popular SBA
  loan program

• CAPLine Program
• International Trade Programs
• Export Working Capital Program
• International Trade Program

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SBA Loan Programs

• Section 504 Certified Development Company Program
• Microloan Program
• Prequalification Loan Program
• Disaster Loans
• 8(A) Loan Program

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State and Local Loan Programs

• Capital Access Programs (CAPs) now offered in
  22 states and are designed to encourage lenders
  to make loans to businesses that do not qualify
  for traditional financing.
• Revolving Loan Fund (RLFs) combine private and
  public funds to make small business loans.
• Greensboro Venture Capital Fund

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Internal Methods of Financing

• Factoring - selling accounts receivable outright.

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Internal Methods of Financing

• Factoring - selling accounts receivable outright

• Leasing assets rather than buying them
• Credit cards

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Web Sites

• American Bankers Associationhttp//www.aba.com/de
  fault.htm
• National Association of Small Business Investment
  Companieshttp//www.nasbic.com/
• U.S. Small Business Administrationhttp//www.sba.
  gov/

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Next Week

• Cash Flow Projections
• Exam II review
• Distance Learning Groups will be doing work on
  the Financial Projection template via BlackBoard
  class time will be used to demonstrate assignment
  and procedure