Chapter

11

Sources of Capital

11-1

Overview
Debt Financing- Interest-Bearing Instrument Requiring Collateral (Asset) Equity Financing- Investor Receives Ownership Position Financing Usually A Combination Of Debt And Equity
11-2

Factors Affecting Type Of Financing

1) Availability of Funds 2) Assets of Venture 3) Prevailing Interest Rates 4) All Financing Requires Some Level of Equity
11-3

Internal Funds
Profits Sale of Assets- Rent Instead Of Purchase Working Capital Reduction Extended/Discounted Payment TermsSuppliers Accounts Receivable- Speed Up Collection Reduction of:
Inventory Cash Working Capital Items
11-4

External Funds
Self Family & Friends Suppliers & Trade Credit Commercial Banks Government Loan Programs
R & D Limited Partnerships Venture Capital Private Equity Placements Public Equity Offerings Other Government Programs
11-5

Personal Funds
Essential To Attract Outside Capital- Indicates Owner Commitment, % Of Personal Assets Sources:
Savings Life Insurance House/Car Mortgage
11-6

Family & Friends

Requires Knowledge Of Entrepreneur Disadvantage- Direct Input Into Operations Advantage- Often More Patient Must Be Done In Business-Like, Written Manner With Terms, etc. Will Loss Have Severe Financial Impact On Family/Friends?
11-7

Private Placement
Formalized Method For Obtaining Funds From Private Investors

Regulation D- Governs Private Offerings

Broad Provision To Simplify
Defines Private Offering Specific Operating Rules
11-8

Commercial Banks
Bank Loans- Asset Based
Accounts Receivable Inventory Equipment Real Estate

Cash Flow Financing

Installment Straight Commercial Long-Term Character
11-9

Lending Decisions
Based On Quantifiable Information & Subjective Judgment Five Cs
1. Character 2. Capacity 3. Capital 4. Collateral 5. Conditions

Review Financial Statements Review Projections = Reality?

11-10

Lending Questions
Does Entrepreneur Expect To Be Carried By Loan? Is Entrepreneur Committed To Spend Effort To Succeed? Business Have Unique Advantage? Downside Risks? Protection Against Disasters?
11-11

Bank Shopping Process

1. Complete Business Plan & Application 2. Evaluate Several Alternative Banks 3. Select One With Positive Experience in Business Area 4. Set Appointment 5. Present Case/Plan 6. Borrow Maximum Amount Possible
11-12

SBA Financing
When Entrepreneur Doesnt Have:
Track Record Assets

SBA-Guarantee For:
Working Capital Machinery/Equipment Furniture/Fixtures Land/Building Leasehold Improvements Debt Refinancing
11-13

R & D Limited Partnerships

Tax Sheltered Money For Developing A Technology- No Guarantee

Elements:
1. Contract 2. Sponsoring Company- General Partner 3. Limited Partnership- Limited Liability

Useful When:
High Risk
Significant Expense
11-14