Chapter 7: Debt Financing

SCOTT MORRISSETTE
 Intro

What is debt? What is collateral?

Banks have been the biggest course of debt financing

for entrepreneurs.
 4 Types of Debt

Senior
Subordinated
Short term
Long term
Please see page 162
 Senior vs. Subordinated Debt

Lender must request senior position

Some lenders may refuse senior position request
because the lender does not want to be the
subordinate or second in line to collect in the event
of default.
 What is considered long term debt?

Any debt that is financed for longer than 12 months.

Examples?
 Short Term Debt

Debt that matures in less than a year

Examples?
Strengths and Weaknesses of Debt Financing

Pros
Entrepreneur retains complete ownership

Cost of capital is low

Loan payments are predictable

There is typically a 3-5-7 year payback period

It can involve value-added lenders

Tax benefits
 Cont

Cons
Personal guarantees may be required

The lender can force the business into bankruptcy

Amounts may be limited to the value of the companys profits

 Sources of Debt Financing

Personal Savings
Family and Friends
Angel Investors rates typically higher than banks
Foundations
Government
Capital Access Programs
SBA
Community Banks
Community Development Financial Institutions
P 2 P Lending
Creative Ways to Structure Long-Term Debt

See page 185

Most institutions are not as flexible as text indicates.
 Long Term Debt Rules to Live By

Always take maximum years allowed to repay

Stay away from pre-payment penalties
Fixed rate better than variable
Renegotiate in tough times
Keep excellent financial records
Show that you work hard, call loan officer early or
late in evening
 Factoring

What is factoring? Any idea?

 Other forms of Financing

Customer financing see example on p. 189

Supplier Financing
Purchase Order Financing
Credit Cards
 Homework

Read the case Entrepreneurial Finance Lab

Discuss what you consider to be three of the most significant
accomplishments of the organization
What should the organization do next? Please refer to the
section Options for the Future on page 9 and support your
recommendation with facts from the case study and at least
one outside resource.