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Class 7

Class 7. Turn in Case I! Discuss Assignment 5 Financing: Equity Debt Excel Template Entering financing information. Sources of Debt & Equity Financing. The “Secrets” to Successful Financing.

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Class 7

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  1. Class 7 • Turn in Case I! • Discuss Assignment 5 • Financing: • Equity • Debt • Excel Template • Entering financing information

  2. Sources of Debt & Equity Financing

  3. The “Secrets” to Successful Financing 1. Choosing the right sources of capital is a decision that will influence a company for a lifetime. 2. The money is out there; the key is knowing where to look. 3. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas.

  4. The “Secrets” to Successful Financing 4. The World Wide Web puts at entrepreneur’s fingertips vast resources of information that can lead to financing. 5. Be thoroughly prepared before approaching lenders and investors. 6. Entrepreneurs should not underestimate the importance of making sure that the “chemistry” between themselves, their companies, and their funding sources is a good one.

  5. Three Types of Capital Capital is any form of wealth employed to produce more wealth for a firm. • Fixed - used to purchase the the permanent or fixed assets of the business (e.g. buildings, land, equipment, etc.). • Working - used to support the small company's normal short-term operations (e.g. buy inventory, pay bills, wages, or salaries, etc.). • Growth - used to help the small business expand or change its primary direction.

  6. Equity Capital • Represents the personal investment of the owner(s) in the business. • Is called risk capital because investors assume the risk of losing their money if the business fails. • Does not have to be repaid with interest like a loan does. • Means that an entrepreneur must give up some ownership in the company to outside investors.

  7. Sources of Equity Financing • Personal savings • Friends and family members • Angels • Partners • Corporations • Venture capital companies • Public stock sale

  8. Personal Savings • The first place an entrepreneur should look for money. • The most common source of equity capital for starting a business. • Outside investors and lenders expect the entrepreneur to put some of her own capital into the business before investing theirs.

  9. Friends and Family Members • After emptying her own pockets, an entrepreneur should turn to those most likely to invest in the business - friends and family members. • Survey of Inc. 500 companies: 30% of business founders relied on family and friends for capital. • Careful!!! Inherent dangers lurk in family/friendly business deals, especially those that flop.

  10. Friends and Family Members • Guidelines for Family and Friendship Financing Deals: • Consider the impact of the investment on everyone involved. • Keep the arrangement “strictly business.” • Settle the details up front. • Create a written contract. • Treat the money as “bridge financing.” • Develop a payment schedule that suits both parties.

  11. Angels • Angels - private investors who back emerging entrepreneurial companies with their own money. • Fastest growing segment of the small business capital market. • Some 400,000 angels invest $50 billion a year in 50,000 small companies.

  12. Angels • Most likely to finance deals in the $10,000 to $2 million range. • Key: finding them! • Angels almost always invest their money locally and can be found through networking. • Another avenue: Angel capital networks on the World Wide Web.

  13. Angels • Typical angel accepts 30% of the proposals presented to him and has invested an average of $131,000 in 3.5 businesses. • An excellent source of “patient money” for investors needing relatively small amounts of capital – often less than $500,000.

  14. Corporate Venture Capital • About 900 large corporations across the globe invest in start-up companies. • 30% of all venture capital investments come from corporations. • Capital infusions are just one benefit; corporate partners may share marketing and technical expertise.

  15. Venture Capital Companies • More than 3,000 venture capital firms operate across the U.S. • Most venture capitalists seek investments in the $3,000,000 to $10,00,000 range in companies with high-growth and high-profit potential. • Business plans are subjected to an extremely rigorous review - less than 1% accepted.

  16. Venture Capital Companies • Usually take an active role in managing the companies in which they invest. • Focus their investments in specific industries with which they are familiar. • Invest in a company across several stages. Most common stages: • Early phase of development • Rapid growth phase

  17. What Do Venture CapitalCompanies Look For? • Competent management • Competitive edge • Growth industry • Viable exit strategy • “Intangibles”

  18. Web Sites • PriceWaterhouseCoopers Money Tree Surveyhttp://www.pwcmoneytree.com/ • Piedmont Angel NetworkPan web-site • ACE-Nethttp://acenet.csusb.edu/

  19. Debt Financing • Must be repaid with interest. • Is carried as a liability on the company's balance sheet. • Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous. • Can be expensive, especially for small companies, because of the risk/return tradeoff.

  20. Consider Borrowing Money to… • Increase your work force and/or inventory to boost sales • Gain market share • Purchase new equipment • Refinance existing debt • Take advantage of cash discounts

  21. Consider Borrowing Money to… • Buy the building in which your business is located • Establish a relationship with a lender • Retire debt held by a “non-relationship” creditor • Deal with a downturn in business

  22. Sources of Debt Capital • Commercial banks

  23. Commercial Banks • Lenders of first resort for small business owners • 80% of all loans to existing businesses come from banks • Focus on a company’s ability to generate positive cash flow when evaluating loan proposals

  24. Commercial Banks ...the heart of the financial market for small businesses! • Short-term loans – Commercial banks’ specialty • Commercial loans • Lines of credit • Floor planning

  25. Commercial Banks ...the heart of the financial market for small businesses! • Intermediate and long term loans • Term loans • Installment loans • Discounted installment contracts • Character loans

  26. Sources of Debt Capital • Commercial banks • Asset-based lenders

  27. Accounts Receivable Asset-Based Borrowing • Discounting accounts receivable • Inventory financing

  28. $$ Sources of Debt Capital • Commercial banks • Asset-based lenders • Trade credit • Equipment suppliers • Commercial finance companies • Saving and loan associations

  29. Sources of Debt Capital (Continued) • Stock brokerage houses • Insurance companies • Credit unions • Bonds • Private placements • Small Business Investment Companies (SBICs)

  30. Small Business Investment Companies (SBICs) • 396 SBICs operate in the U.S. • Use combination of private capital and federally guaranteed debt to provide long-term capital to small companies. • Since 1960, SBICs have provided more than $26.5 billion in financing to some 90,000 small companies.

  31. Sources of Debt Capital (Continued) • Stock brokerage houses • Insurance companies • Credit unions • Bonds • Private placements • Small Business Investment Companies (SBICs) • Small Business Lending Companies (SBLCs)

  32. Sources of Debt Capital (Continued) Federally Sponsored Programs: • Economic Development Administration (EDA) • Department of Housing and Urban Development (HUD) • U.S. Department of Agriculture’s Rural Business-Cooperative Service

  33. Sources of Debt Capital (Continued) Federally Sponsored Programs: • Local Development Companies (LDCs) • Small Business Innovation Research (SBIR) • Small Business Technology Transfer programs • Small Business Administration (SBA)

  34. Small Business Administration Loan Programs • Low Doc Loan Program • SBAExpress Program • 7(A) Loan Guaranty Program – the most popular SBA loan program

  35. Small Business Administration Loan Programs • Low Doc Loan Program • SBAExpress Program • 7(A) Loan Guaranty Program – the most popular SBA loan program • CAPLine Program • International Trade Programs • Export Working Capital Program • International Trade Program

  36. SBA Loan Programs • Section 504 Certified Development Company Program • Microloan Program • Prequalification Loan Program • Disaster Loans • 8(A) Loan Program

  37. State and Local Loan Programs • Capital Access Programs (CAPs) – now offered in 22 states and are designed to encourage lenders to make loans to businesses that do not qualify for traditional financing. • Revolving Loan Fund (RLFs) – combine private and public funds to make small business loans. • Greensboro Venture Capital Fund

  38. Internal Methods of Financing • Factoring - selling accounts receivable outright.

  39. Internal Methods of Financing • Factoring - selling accounts receivable outright • Leasing assets rather than buying them • Credit cards

  40. Web Sites • American Bankers Associationhttp://www.aba.com/default.htm • National Association of Small Business Investment Companieshttp://www.nasbic.com/ • U.S. Small Business Administrationhttp://www.sba.gov/

  41. Next Week • Cash Flow Projections • Exam II review • Distance Learning – Groups will be doing work on the Financial Projection template via BlackBoard; class time will be used to demonstrate assignment and procedure

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