The document discusses various methods for financing a business, including obtaining gifts and grants, borrowing money through debt financing, or exchanging equity for capital. It notes the pros and cons of debt financing, such as fixed loan payments but no ownership stake, versus equity financing which involves sharing profits and control. The document also outlines criteria lenders consider like collateral, character, capacity and conditions of the borrower, as well as alternative sources of capital beyond banks.

1. Entrepreneurship
Chapter 10
Financing Strategy:
Debt, Equity or Both?

2. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
2
Financing
Ways to obtain capital for a business:
1. Obtain gifts & grants
2. Borrow money (debt)
3. Exchange a share of the business for
money (equity)

3. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
3
Ways to Secure Growth Funding
 Finance with earnings
 Finance with equity
 Finance with debt

4. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
4
How Often Do Small
Businesses Fail?
 Myth: 4 out of 5 small businesses fail in the
first 5 years of operation.
 Truth: over half of new small firms survive for
8 or more years. (according to Dun &
Bradstreet study)
 A small business is a high risk-high return
investment.

5. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
5
Gifts & Grants
 Don’t stake your business on these
 Gifts
 Cash, free facilities & equipment, unpaid labor
from friends & family, & forgiveness of debts
 Tax abatements & tax credits
 Grants
 Primarily for research & commercialization
 Difficult to get for low-tech, start-ups
 Gifts & grants do not require repayment

6. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
6
How Can You Compensate
Investors in Your Business?
1. Debt—Borrow money & promise to
pay it back over a set period of time
at a set rate of interest. Investor
receives interest.
2. Equity—Sell a percentage (share) of
ownership in your business for money.
Investor receives share of profits.

7. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
7
Debt Financing
 Available in many forms
 Commercial loans
 Personal loans
 Leases
 Bonds

8. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
8
Debt Financing: Pros and Cons
Pros:
 Lender has no say in operation of business
 Loan payments are predictable
 Lenders do not share business profits
Cons:
 If loan payments are not made, lender can force
business into bankruptcy
 If business is not incorporated & defaults, lender can
take house & other possessions of owner
 Loan payments increase fixed costs, lower profit

9. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
9
Equity Financing: Pros and Cons
Pros:
 If business does not make profit, investor does not
get paid
 Equity investors want business to succeed, will share
contacts & advice
Cons:
 Entrepreneur can lose control of business to equity
investors
 Equity investor takes more risk, wants higher return
 Entrepreneur must share profits with equity investors

10. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
10
The 5 “Cs” of Credit
1. Collateral
2. Character
3. Capacity
4. Capital
5. Conditions

11. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
11
Community Development
Financial Institutions (CDFIs)
 Community Development Banks
 Community Development Credit Unions
 Community Development Loan Funds
 Community Development Venture
Capital Funds

12. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
12
Other Non-Bank Sources
 Friends & family
 Venture capitalists
 Angels
 Insurance companies
 Vendors
 Federally supported investment companies (SBICS,
MESBICS, New Market Venture Companies)
 Rural programs
 Youth financing
 Bootstrap financing

13. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
13
Creative Financing Options
Microenterprise Loans:
 Up to $35,000, often supported by federal
government or not-for-profit agencies
 Loan made based alternative credit criteria & may
require training, counseling, &/or a business plan
 May be the only option for debt financing outside of
family & friends & personal credit cards for many
entrepreneurs
 Often a social impact goal involved for the lender

14. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
14
More Creative Financing
Angel Financing:
 Private investors seeking equity
 Typically $100,000–$500,000 range
Bootstrap Financing:
 Hire as few employees as possible.
 Lease rather than buy equipment.
 Use personal savings.
 Work from home, borrow office space (business
incubators).
 Put profits back into business.

15. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
15
3 Categories of Financial
Investment
1. Stocks—shares of companies (equity)
2. Bonds—loans to companies or government entities
(debt)
3. Cash—investments that can be liquidated (turned
into cash) within 24 hours (savings accounts,
treasury bills)
The higher the reward an investment offers, the
greater the risk.

16. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
16
Stocks
 Shares of stock represent a percentage
ownership in a corporation.
 Public corporations sell stock to the
general public to raise capital.
 Prices of stocks reflect investors’
opinions about business performance &
value.
 Traded on stock exchanges.

17. Entrepreneurship, 2nd Edition
Mariotti and Glackin and NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
17
Bonds
 Interest bearing certificates that
corporations & governments issue to
raise capital.
 Lower risk & return expected than with
stocks.
 A form of debt financing with a
guaranteed rate of return to investors.
 Trade at premiums or discounts.