© 2005 The McGraw-Hill Companies, Inc. All 11-1 rights reserved.



Sources of Capital


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


Factors Affecting Type Of Financing
1) 2) 3) Availability of Funds Assets of Venture Prevailing Interest Rates 4) All Financing Requires Some Level of Equity

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

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

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

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?

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


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

 Cash Flow Financing
 Installment  Straight Commercial  Long-Term  Character

Lending Decisions
 Based On Quantifiable Information & Subjective Judgment  Five “C’s”
1. 2. 3. Character Capacity Capital 4. 5. Collateral Conditions

 

Review Financial Statements Review Projections = Reality?

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?

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


SBA Financing
When Entrepreneur Doesn’t Have:
 Track Record  Assets

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


SBA Conditions
Business Cash Flow Five “C’s”- 20%+ Ownership Requires Personal Guarantee Eligibility:
 Size  Type Of Business  Use Of Proceeds  Availability Of Funds From Other Sources

SBA 7(a) Loan
Up To $2 Million- SBA Exposure No More Than $1 Million Interest Rate Negotiated & Pegged To Prime Rate Guarantee 85% On Loan < $150,000 Guarantee 75% On Loan $150,000 To $1 Million

Other SBA Programs
504 Loan Program- Fixed Rate
 Acquire Machinery, Equipment, Real Estate  Expand/Modernize  <$1 Million

Microloan- 7(m)
 Short-Term < $35,000  Working Capital, Inventory, Supplies, Furniture, Fixtures, Machinery, Equipment  Not For Existing Debt

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

R & D Contract Features
1) Loss Liability Borne By Limited Partners 2) Tax Advantages To Limited Partnership & Sponsoring Company 3) Benefits/Costs
a) Provides Funds With Minimum Equity Dilution b) Expensive To Establish

Government (SBIR) Grants
Phase I- Up To $100,000 For 6 Months Feasibility Study Phase II- Principal R & D Effort, Up to $750,000 For 24 Months, Develop Prototype Products/Services Phase III- Commercialization, No SBIR Funding

R & D Limited Liability Stages
I. Funding
A. Contract EstablishedTerms/Conditions Of Ownership B. Money Invested


Development- Research Performed III. Exit- Reap Benefits
A. B. C. Equity Partnership Royalty Partnership Joint Venture