Sources of Financing: Debt and Equity


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Sources of Financing: Debt and Equity

  1. 1. Sources of Financing: Debt and Equity If you don’t know who the fool is on the deal, it’s you! ...Michael Wolff
  2. 2. Planning for Capital Needs <ul><li>Capital : any form of wealth employed to produce more wealth </li></ul><ul><li>Fixed capital : to purchase a company’s permanent or fixed assets such as land, buildings, computers, and equipment </li></ul><ul><li>Working capital : to support a business’s short-term operations </li></ul><ul><li>Growth capital : to finance a company’s growth or its expansion in a new direction </li></ul>
  3. 3. Equity vs Debt Capital <ul><li>Equity capital : represents the personal investment of the owner (s) of a company </li></ul><ul><li>Debt capital : the financing that a small business owner has borrowed and must repay with interest </li></ul>
  4. 4. Sources of Equity Capital <ul><li>Personal savings </li></ul><ul><li>Friends and family members </li></ul><ul><li>Angels </li></ul><ul><li>Partners </li></ul><ul><li>Corporate venture capital </li></ul><ul><li>Venture capital companies </li></ul><ul><li>Public stock sale </li></ul>
  5. 5. Angels <ul><li>Private investors , wealthy individuals, entrepreneurs themselves, who provide money in exchange for equity stakes </li></ul><ul><li>Ranging from $10,000 to $2M </li></ul><ul><li>Every year: 230,000 angels , $23 B, 50,000 companies </li></ul><ul><li>Average: 10% of opportunities, 2 investments per year, $80,000 in 3.5 firms </li></ul><ul><li>Angel networks : 200 </li></ul><ul><li>Patient money </li></ul>
  6. 6. Venture Capital Companies <ul><li>$3-10M </li></ul><ul><li>Competent management </li></ul><ul><li>Competitive edge </li></ul><ul><li>Growth industry </li></ul><ul><li>Viable exit strategy </li></ul><ul><li>Intangible factors </li></ul>
  7. 7. Public Stock Sale <ul><li>Advantages </li></ul><ul><li>Ability to raise large amounts of capital </li></ul><ul><li>Improved corporate image </li></ul><ul><li>Improved access to future financing </li></ul><ul><li>Use of stock for acquisitions </li></ul><ul><li>Listing on a stock exchange </li></ul>
  8. 8. Public Stock Sale <ul><li>Disadvantages </li></ul><ul><li>Dilution of ownership </li></ul><ul><li>Loss of control </li></ul><ul><li>Loss of privacy </li></ul><ul><li>Reporting to SEC </li></ul><ul><li>Filing expenses </li></ul><ul><li>Accountability to shareholders </li></ul><ul><li>Pressure for short-term performance </li></ul><ul><li>Demands of time and timing </li></ul>
  9. 9. Debt Financing <ul><li>Commercial banks </li></ul><ul><li>Non-banks </li></ul><ul><li>Federally-sponsored programs </li></ul><ul><li>State and Local Development Programs </li></ul><ul><li>Internal methods of financing </li></ul>
  10. 10. Commercial Banks <ul><li>Short-term loans </li></ul><ul><li>Commercial loans </li></ul><ul><li>Lines of credit </li></ul><ul><li>Floor-planning </li></ul><ul><li>Intermediate and long-term loans </li></ul><ul><li>Installment loan </li></ul><ul><li>Term loan </li></ul>
  11. 11. Non-Bank Sources <ul><li>Asset-based lenders </li></ul><ul><li>Vendor financing </li></ul><ul><li>Equipment suppliers </li></ul><ul><li>Commercial finance companies </li></ul><ul><li>Savings and loan associations </li></ul><ul><li>Stock brokerage houses </li></ul><ul><li>Insurance companies </li></ul><ul><li>Credit unions </li></ul><ul><li>Bonds </li></ul><ul><li>Private placements </li></ul><ul><li>Small business investment companies </li></ul><ul><li>Small business lending companies </li></ul>
  12. 12. Federally Sponsored Programs <ul><li>Economic Development Administration </li></ul><ul><li>Department of Housing and Urban Development </li></ul><ul><li>Department of Agriculture’s Rural Cooperative Service </li></ul><ul><li>Small Business Innovation Research Program </li></ul><ul><li>Small Business Technology Transfer Program </li></ul><ul><li>Small Business Administration </li></ul>
  13. 13. Small Business Administration <ul><li>Low Doc Loan Program </li></ul><ul><li>SBA Express Program </li></ul><ul><li>7A Loan Guaranty Program </li></ul><ul><li>CAPLine Program </li></ul><ul><li>Loans Involving International Trade </li></ul><ul><li>Section 504 Certified Development Company Program </li></ul><ul><li>Microloan Program </li></ul><ul><li>Prequalification Loan Program </li></ul><ul><li>Disaster Loans </li></ul>
  14. 14. State and Local Loan Development Programs <ul><li>Capital access programs : encourages lending institutions to make loans to businesses that do not qualify for traditional financing because of higher risk </li></ul><ul><li>Revolving loan funds : offered by communities that combine private and public funds to make loans to small businesses, often at below-market interest rates </li></ul>
  15. 15. Internal Methods <ul><li>Factoring accounts receivable </li></ul><ul><li>Leasing </li></ul><ul><li>Credit cards </li></ul>