McGraw-Hill/Irwin

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Chapter

11

Sources of Capital

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

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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
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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
11-5

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
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Personal Funds
Essential To Attract Outside Capital- Indicates Owner Commitment, % Of Personal Assets Sources:
 Savings  Life Insurance  House/Car Mortgage
11-7

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?
11-8

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

11-9

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

 Cash Flow Financing
 Installment  Straight Commercial  Long-Term  Character
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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?
11-11

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?
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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

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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

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

II.

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

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