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Chapter 14 – Raising Capital

Chapter 14 – Raising Capital. Learning Objectives Describe the life cycle of a business Explain funding process and relationship of angels and venture capitalists to business Enumerate bank loans vs. bonds vs. equity Examine commercial paper and banker’s acceptance

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Chapter 14 – Raising Capital

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  1. Chapter 14 – Raising Capital • Learning Objectives • Describe the life cycle of a business • Explain funding process and relationship of angels and venture capitalists to business • Enumerate bank loans vs. bonds vs. equity • Examine commercial paper and banker’s acceptance • Understand funding sources at different times • Describe options and regulations when closing a business

  2. Business Life Cycle • Business Life Cycle • Infancy (start-up of business) • Youth (growth phase) • Maturity (stable business) • Old Age (decline of business) • Death (termination of business • Fact Check • 3 out of 5 employer businesses fail in first six years • Each cycle presents different financing choices

  3. Borrowing for a Start-up • Five Main Sources • Personal Funds • Borrowed from Family and Friends • Commercial Banks • Small Business Association (SBA Funds) • Angel or Venture Capitalist • SBA • 7(a) Loan Guaranty Program • Administers to individuals that might not qualify from a commercial bank directly…still a commercial bank loan • Guaranty is to bank for loan… • Angel Financing or Venture Capitalist • Sequential funding • Careful of exit strategies

  4. Borrowing for a Stable Business • Commercial Banks • Straight Loan (Example 14.2) • Discount Loan (Example 14.3) • Letter of Credit (Example 14.4) • Compensating Balance (Example 14.5) • Large Firm Options • Selling Bonds • Selling Stocks • Regulations for Bonds and Stocks • Glass-Steagall Act of 1932 • Banking Act of 1933 • Securities Act of 1933 • Securities Exchange Act of 1934

  5. Selling Stock • Approval from SEC • Request authorization • Provide specific information to SEC • Approves sale does not make a buy recommendation • Investment Banker • Hired as “partner” in process for expertise and contacts • Must conduct “due diligence” prior to sale • Compensated by spread on securities sale • Best efforts • Firm Commitment • Documents • Registration • Prospectus • Letter of Comment • Tombstone for Advertising the sale

  6. Selling Stock • Road Show • Meet potential buyers • Provide essential information on company, industry, and market • Assess potential of issue • Auction • Price set, auction for quantity • Over and Under subscribed issues • Over subscribed – pro rata share distribution • Under subscribed – depends on investment banker payment • Aftermarket – Trading on NASDAQ • Lock-up Agreement (owners can not sell immediately)

  7. Other Borrowing Options • Commercial Paper • Short term borrowing, maturity less than 270 days • Offered directly by company to “public” • Standard size is $100,000 face value • Discount note • Banker’s Acceptance • Typically finances self-liquidating inventories • Post dated check sponsored by a commercial bank • Allows “local” company to deal with banks and companies out of their area through their “local” bank

  8. Closing the Business • Successful business • Sells of assets • Distributes funds to lenders and owners • Unsuccessful business -- Bankruptcy • Chapter 7 • Straight Liquidation (Business is over) • Chapter 11 • Reorganization (Business needs to reorganize to compete) • Reorganization plan filed in court • Court oversees process • Claimants have voice and vote in plan • Most Chapter 11s eventually turn into Chapter 7

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