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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 Cs
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 Doesnt 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 Cs- 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