Sources

Sources of
of Funds:
Funds:
Equity
Equity and
and Debt
Debt

Chapter 10: Business Plan

Copyright 2002 Prentice Hall Publishing Company

1

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.

Chapter 10: Business Plan

Copyright 2002 Prentice Hall Publishing Company

2

The “Secrets” to Successful
Financing
(continued)

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.

Chapter 10: Business Plan

Copyright 2002 Prentice Hall Publishing Company

3

etc. wages.) Working .g. pay bills. etc. land. equipment.) Growth . buy inventory. salaries..    Fixed .used to help the small business expand or change its primary direction..Three Types of Capital Capital is any form of wealth employed to produce more wealth for a firm.used to support the small company’s normal short-term operations (e.used to purchase the permanent or fixed assets of the business (e. buildings. Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 4 .g.

Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 5 . Means that an entrepreneur must give up some ownership in the company to outside investors. 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.Equity Capital     Represents the personal investment of the owner(s) in the business.

Sources of Equity Financing Personal savings  Friends and family members  Angels  Partners  Corporations  Venture capital companies  Public stock sale  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 6 .

Sweat equity and personal risk equity (non-monitary) Copyright 2002 Prentice Hall Publishing Company 7 .Personal Savings     Chapter 10: Business Plan 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.

Copyright 2002 Prentice Hall Publishing Company 8 . an entrepreneur should turn to those most likely to invest in the business – friends and family members. Survey: 10% of business owners turn to family and friends for capital. especially those that flop.Friends and Family Members    Chapter 10: Business Plan After emptying her own pockets. Careful!!! Inherent dangers lurk in family/friendly business deals.

 Treat the money as “bridge financing. Keep the arrangement “strictly business.”  Settle the details up front.  Create a written contract.”  Develop a payment schedule that suits both parties. Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 9 .Friends and Family Members  Guidelines for Family and Friendship Financing Deals:  Consider the impact of the investment on everyone involved.

Fastest growing segment of the small business capital market.Angels    Chapter 10: Business Plan Angels . Copyright 2002 Prentice Hall Publishing Company 10 . An excellent source of “patient money” for investors needing relatively small amounts of capital – often less than $500.000.private investors who back emerging entrepreneurial companies with their own money.

5 businesses.  What do angels look for?   Exciting ideas (with clear potential)  A way to help a trusted friend Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 11 .Angels Key: finding them!  Angels almost always invest their money locally and can be found through “networks.000 in 3.”  The typical angel accepts 30% of the proposals presented to him and has invested an average of $131.

 Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 12 .  Capital infusions are just one benefit.Corporate Venture Capital 30% of all venture capital investments come from corporations.  About 900 large corporations across the globe invest in start-up companies. corporate partners may share marketing and technical expertise.

000 .  Most venture capitalists seek investments in the $3.000.Venture Capitalist Companies More than 3.000 venture capital firms operate across the United States.000 range in companies with high-growth and highprofit potential.  Business plans are subjected to an extremely rigorous review – less than 1% accepted.  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 13 .000.$10.

 Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 14 .  Many venture capitalists focus their investments in specific industries with which they are familiar.Venture Capitalist Companies Most venture capitalists take an active role in managing the companies in which they invest. venture capitalists invest in a company across several stages.  Most often.

000 800 600 400 200 - $20.0 $15.800 1.600 1.1.200 1.0 Number of Deals Venture Capital Financing 1995 1996 1997 Billions of $ Chapter 10: Business Plan 1998 1999 2000 Number of Deals Copyright 2002 Prentice Hall Publishing Company 15 .0 $10.0 $5.0 $Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Amount Financed (in Billions of $) $25.400 1.

What Do Venture Capital Companies Look For? Competent management  Competitive edge  Growth industry  Viable exit strategy  “Intangibles”  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 16 .

A common exit strategy for investors (but needs strong justification) Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 17 . Few companies with sales below $10 million in annual sales make IPOs.Going Public     Initial public offering (IPO) .when a company raises capital by selling shares of its stock to the public for the first time. Typical year: about 550 companies make IPOs.

0 $40.0 $30.0 $60.Number of IPOs 1000 800 600 400 200 0 Chapter 10: Business Plan $80.0 $10.0 $20.0 $0.0 Copyright 2002 Prentice Hall Publishing Company Money Raised ($ billions) Initial Public Offerings Number $ Raised (Billions) 18 .0 $50.0 $70.

Advantages of “Going Public”       Chapter 10: Business Plan Ability to raise large amounts of capital Improved corporate image Improved access to future financing Attracting and retaining key employees Using stock for acquisitions Listing on a stock exchange Copyright 2002 Prentice Hall Publishing Company 19 .

Disadvantages of “Going Public”         Chapter 10: Business Plan Dilution of founder’s ownership Loss of control Loss of privacy Reporting to the SEC Filing expenses Accountability to shareholders Pressure for short-term performance Timing Copyright 2002 Prentice Hall Publishing Company 20 .

The Registration Process (S-1 filing) Choose the underwriter (sells the stock)  Negotiate a letter of intent ($)  Prepare the registration statement (risks)  File with the SEC  Wait to “go effective” (limit information)  Meet state requirements  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 21 .

Small Company Offering Registration (SCOR)      Limited legal help required No SEC filing Marketing the offering is OK $1 million max in 12 month period Regulation D: Rule 505 and 506  Private placements to max of 35 nonaccredited investors  Some limitations on total amount to be raised  Section 4 (6) – Accredited investors Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 22 .Simplified Registrations and Exemptions – Get a lawyer   Regulation S-B (small US business only) Regulation D: Rule 504 .

Simplified Registrations and Exemptions (continued)    Rule 147 (Intrastate offerings) Regulation A (few restrictions but expensive) Direct Stock Offering on the World Wide Web (WWW)  Direct Public Offering (DPO)  Prospectus must still meet SEC requirements  Foreign Stock Markets (sometimes easier but often more volatile) Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 23 .

Is carried as a liability on the company’s balance sheet. even though sources of debt financing are more numerous. Can be expensive. Can be just as difficult to secure as equity financing. especially for small companies. because of the risk/return tradeoff. Convertible loans (very popular if IPO might be used as an exit strategy) Copyright 2002 Prentice Hall Publishing Company 24 .Debt Financing      Chapter 10: Business Plan Must be repaid with interest.

Sources of Debt Capital  Commercial banks Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 25 .

the heart of the financial market for small businesses!    Cash flow is the key Relationships! Short-term loans   Commercial loans (prime +.. unsecured) Lines of credit (limit tied to working capital)  Floor planning (ID numbers)  Intermediate and long-term loans  Installment loans and contracts Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 26 ..Commercial Banks .

Sources of Debt Capital Commercial banks  Asset-based lenders  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 27 .

Asset-Based Borrowing  Discounting accounts Accounts Receivable receivable  Inventory financing Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 28 .

high interest)  Saving and loan associations (real property)  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 29 .Sources of Debt Capital $$ Commercial banks  Asset-based lenders  Trade credit (materials suppliers)  Equipment suppliers  Commercial finance companies (security interests. guarantees.

etc) Small Business Investment Companies (SBICs) – usually options or convertible loans Small Business Lending Companies (SBLCs) Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 30 .Sources of Debt Capital        (continued) Stock brokerage houses (margin loans) Insurance companies Credit unions Bonds (industrial development bonds) Private placements (insurance companies.

Sources of Debt Capital (concluded) Federally Sponsored Programs: Economic Development Administration (EDA)  Department of Housing and Urban Development (HUD)  U.S. Department of Agriculture’s Rural Business-Cooperative Service  Local Development Companies (LDCs)  Small Business Innovation Research (SBIR)  Small Business Technology Transfer programs  Small Business Administration (SBA)  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 31 .

Small Business Administration Loan Programs Low Doc Loan Program  SBAExpress Program  7(A) Loan Guarantee Program – the most popular SBA loan program  CAPLine Program  International Trade Programs   Export Working Capital Program  International Trade Program Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 32 .

SBA Loan Programs Section 504 Certified Development Company Program  Microloan Program ($100 to $25.000)  Prequalification Loan Program (disadvantaged entrepreneurs)  Disaster Loans  8(A) Loan Program (minority owners)  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 33 .

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. Specialty loans (environmental. Revolving Loan Fund (RLFs) – combine private and public funds to make small business loans.) Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 34 . etc. regional.

selling accounts receivable outright  Leasing assets rather than buying them  Credit cards  Chapter 10: Business Plan Copyright 2002 Prentice Hall Publishing Company 35 .Internal Methods of Financing Factoring .