Sources of Financing: Debt and Equity

Chapter 13: Sources of Funds

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Raising Capital

Raising capital to launch or expand a business is a challenge. Many entrepreneurs are caught in the credit crunch.

Chapter 13: Sources of Funds

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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. Raising money takes time and effort. 4. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas.

Chapter 13: Sources of Funds

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The Secrets to Successful Financing

5. The World Wide Web puts at entrepreneurs fingertips vast resources of information that can lead to financing. 6. Be thoroughly prepared before approaching lenders and investors. 7. Entrepreneurs should not underestimate the importance of making sure that the chemistry among themselves, their companies, and their funding sources is a good one.

Chapter 13: Sources of Funds

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Layered Financing

Entrepreneurs must cast a wide net to capture the financing they need to launch their businesses. Layering piecing together capital from multiple sources.

Chapter 13: Sources of Funds

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Three Types of Capital

Capital is any form of wealth employed to

produce more wealth for a firm. Fixed - used to purchase the permanent or fixed assets of the business (e.g., buildings, land, equipment, and others). Working - used to support the small company's normal short-term operations (e.g., buy inventory, pay bills, wages, or salaries, and others). Growth - used to help the small business expand or change its primary direction.
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Chapter 13: Sources of Funds

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.

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Debt Capital

Must be repaid with interest. Is carried as a liability on the companys 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.

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Sources of Equity Financing

Personal savings Friends and family members Angels Partners Corporations Venture capital companies Public stock sale Simplified registrations and exemptions
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Chapter 13: Sources of Funds

Sources of Debt Capital

Commercial banks

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Commercial Banks
...the heart of the financial market for small businesses!

Short-term loans
Commercial loans Lines of credit Floor planning

Intermediate and long-term loans

Installment loans and contracts

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Six Most Common Reasons Bankers Reject Small Business Loans

1.

2.

Our bank doesnt make small business loans. Cure: Before applying for a loan, research banks to find out which ones seek the type of loan you need. I dont know enough about you or your business. Cure: Develop a detailed business plan to present to the banker.

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Six Most Common Reasons Bankers Reject Small Business Loans

(continued)

3.

4.

You havent told me why you need the money. Cure: Your business plan should explain how much money you need and how you plan to use it. Your numbers dont support your loan request. Cure: Include a cash flow forecast in your business plan.

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Six Most Common Reasons Bankers Reject Small Business Loans

(continued)

5.

6.

You dont have enough collateral. Cure: Be prepared to pledge your companys assets and perhaps your personal assets as collateral for the loan. Your business does not support the loan on its own. Cure: Be prepared to provide a personal guarantee on the loan.

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Sources of Debt Capital

Commercial banks Asset-based lenders

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Sources of Debt Capital

Commercial banks Asset-based lenders Vendor financing (trade credit) Equipment suppliers Commercial finance companies Saving and loan associations

$$

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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)

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