Chapter 13

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Chapter 13

  1. 1. CHAPTER 13 DISCUSSION QUESTIONS 1) Explain the difference & the advantages/disadvantages of equity capital & debt capital. 2) Discuss the following sources of equity capital: A) Angels B) Corporate Venture Capital C) Venture Capital Companies 3) Explain the following federal loan programs aimed at small businesses: A) EDA B) HUD C) USDA D) SBIR E) STTR
  2. 2. <ul><li>CAPITAL </li></ul><ul><li>-”ANY FORM OF WEALTH EMPLOYED TO PRODUCE MORE WEALTH.” </li></ul><ul><li>-3 MAIN FORMS </li></ul><ul><li>CASH </li></ul><ul><li>INVENTORY </li></ul><ul><li>EQUIPMENT </li></ul>
  3. 3. <ul><li>ENTREPRENEURS NEED 3 DIFFERENT TYPES OF CAPITAL </li></ul><ul><li>FIXED CAPITAL </li></ul><ul><li>WORKING CAPITAL </li></ul><ul><li>GROWTH CAPITAL </li></ul>
  4. 4. 1) FIXED CAPITAL -”CAPITAL NEEDED TO PURCHASE A COMPANY’S PERMANENT OR FIXED ASSETS.” -MAIN TYPES OF PERMANENT/FIXED ASSETS: 1) LAND 2) BUILDINGS 3) EQUIPMENT -MONEY INVESTED IN FIXED ASSETS TENDS TO BE FROZEN BECAUSE IT CANNOT BE USED FOR ANY OTHER PURPOSE.
  5. 5. <ul><li>2) WORKING CAPITAL </li></ul><ul><li>-”CAPITAL NEEDED TO SUPPORT A COMPANY’S SHORT-TERM OPERATIONS.” </li></ul><ul><li>-CURRENT ASSETS MINUS CURRENT LIABILITIES. </li></ul><ul><li>-WORKING CAPITAL IS NORMALLY USED TO: </li></ul><ul><li>BUY INVENTORY. </li></ul><ul><li>PAY BILLS. </li></ul><ul><li>FINANCE CREDIT SALES. </li></ul><ul><li>PAY WAGES & SALARIES. </li></ul><ul><li>TAKE CARE OF UNEXPECTED EMERGENCIES. </li></ul>
  6. 6. <ul><li>3) GROWTH CAPITAL </li></ul><ul><li>-”CAPITAL NEEDED TO FINANCE A COMPANY’S GROWTH OR EXPANSION IN A NEW DIRECTION.” </li></ul><ul><li>-GROWTH CAPITAL FINANCES: </li></ul><ul><li>EXPANSION OR PURCHASING NEW BUILDINGS </li></ul><ul><li>HIRING ADDITIONAL WORK FORCE </li></ul><ul><li>INCREASING INVENTORY </li></ul>
  7. 7. EQUITY CAPITAL VS DEBT CAPITAL FINANCING THE CAPITAL REQUIREMENTS OF A START-UP BUSINESS
  8. 8. <ul><li>DEBT CAPITAL </li></ul><ul><li>-”THE FINANCING THAT A SMALL BUSINESS OWNER HAS BORROWED & MUST REPAY.” </li></ul><ul><li>-FEW ENTREPRENEURS HAVE ENOUGH SAVINGS TO COVER START-UP COSTS, SO THEY MUST RELY ON SOME FORM OF DEBT CAPITAL TO LAUNCH THEIR COMPANIES. </li></ul><ul><li>PRIMARY ADVANTAGE: </li></ul><ul><li>-ENTREPRENEURS KEEP TOTAL OWNERSHIP & CONTROL OF BUSINESS. </li></ul><ul><li>PRIMARY DISADVANTAGE: </li></ul><ul><li>-SMALL BUSINESS LOANS ARE DIFFICULT TO OBTAIN. </li></ul>
  9. 9. <ul><li>EQUITY CAPITAL </li></ul><ul><li>-”CAPITAL THAT REPRESENTS THE PERSONAL INVESTMENT OF THE OWNER(S) OF A COMPANY. </li></ul><ul><li>-SOMETIMES CALLED RISK CAPITAL. </li></ul><ul><li>-PRIMARY ADVANTAGE: </li></ul><ul><li>DOES NOT HAVE TO BE PAID BACK LIKE A LOAN DOES. </li></ul><ul><li>-EQUITY INVESTORS ARE ENTITLED TO SHARE IN THE COMPANY’S EARNINGS & UUALLY HAVE A VOICE IN THE COMPANY’S FUTURE DIRECTION. </li></ul><ul><li>-PRIMARY DISADVANTAGE: </li></ul><ul><li>THE ENTREPRENEUR MUST GIVE UP SOME, SOMETIMES MOST, OF THE OWNERSHIP IN THE BUSINESS TO OUTSIDERS. </li></ul><ul><li>-GIVING UP CONTROL OF A COMPANY FOR AN ENTREPRENEUR IS AN OXYMORON. </li></ul>
  10. 10. SOURCES OF EQUITY FINANCING
  11. 11. ANGELS -”WEALTHY INDIVIDUALS WHO INVEST IN BUSINESS START-UPS IN EXCHANGE EQUITY STAKES IN THE COMPANIES.” -TODAY, THE LARGEST SOURCE OF EXTERNAL FINANCING FOR COMPANIES IN THE START-UP PHASES.
  12. 12. VENTURE CAPITAL -”FUNDS MADE AVAILABLE FOR STARTUP FIRMS WITH EXCEPTIONAL GROWTH POTENTIAL.” CORPORATE VENTURE CAPITAL -LARGE CORPORATIONS THAT INVEST IN FLEDGLING COMPANIES, MOST OFTEN THOSE IN THE PRODUCT DEVELOPMENT & SALES GROWTH STAGES. VENTURE CAPITAL COMPANIES -PRIVATE, FOR-PROFIT COMPANIES THAT PURCHASE EQUITY POSITIONS IN YOUNG BUSINESSES THEY BELIEVE HAVE HIGH-GROWTH & HIGH-PROFIT POTENTIAL.
  13. 13. <ul><li>THE BOSTON BEER COMPANY: BREWING THE AMERICAN DREAM </li></ul><ul><li>Small business loans from $500-$25,000: Food and beverage small business owners can get the capital needed to expand or start a business, purchase inventory or equipment, market a business, pay licensing fees, etc. </li></ul><ul><li>Financial and business education seminars: Through free seminars, The Boston Beer Company gives top-line guidance, answers questions and helps solve small business challenges. </li></ul><ul><li>Speed coaching events: Small business owners can meet with The Boston Beer Company's employees to gain customized business advice on a range of topics: marketing, distribution, accounting, etc. </li></ul>
  14. 14. FEDERAL LOAN PROGRAMS
  15. 15. ECONOMIC DEVELOPMENT ADMINISTRATION (EDA) -A BRANCH OF THE COMMERCE DEPARTMENT, THAT OFFERS LOAN GUARANTEES TO CREATE NEW BUSINESS & TO EXPAND EXISTING BUSINESSES IN IN AREAS WITH BELOW-AVERAGE INCOME & HIGH UNEMPLOYMENT.
  16. 16. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT (HUD) -SPONSORS LOAN PROGRAMS TO ASSIST QUALIFIED ENTREPRENEURS TO START SMALL BUSINESSES THAT WILL STRENGTHEN THE LOCAL ECONOMY . -GRANTS ARE AIMED AT CITIES & TOWNS IN NEED OF REVITALIZATION & ECONOMIC STIMULATION.
  17. 17. RURAL BUSINESS-COOPERATIVE SERVICE (RBS) -PROVIDED BY THE U.S. DEPARTMENT OF AGRICULTURE. -A FINANCIAL ASSISTANCE PROGRAM OPEN TO ALL TYPES OF BUSINESSES DESIGNED TO CREATE NONFARM EMPLOYMENT OPPORTUNITIES IN RURAL AREAS.
  18. 18. -A PROGRAM OF 11 FEDERAL AGENCIES THAT AWARD CASH GRANTS OR LONG-TERM CONTRACTS TO COMPANIES WANTING TO INITIATE OR TO EXPAND THEIR RESEARCH & DEVELOPMENT EFFORTS. -SBIR GRANTS GIVE INNOVATIVE SMALL COMPANIES THE OPPORTUNITY TO ATTRACT EARLY-STAGE CAPITAL INVESTMENTS WITHOUT HAVING TO GIVE UP SIGNIFICANT EQUITY STAKES OR TAKING ON BURDENSOME LEVELS OF DEBT. SMALL BUSINESS INNOVATION RESEARCH PROGRAM (SBIR)
  19. 19. SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR) -USES COMPANIES TO EXPLOIT THE VAST RESERVOIR OF COMERCIALLY PROMISING IDEAS THAT ORIGINATE IN UNIVERSITIES, FEDERALLY FUNDED R&D CENTERS, & NONPROFIT RESEARCH INSTITUTIONS.

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