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McGraw-Hill/Irwin

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

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
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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
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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?
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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

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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 Cs
1. 2. 3. Character Capacity Capital 4. 5. Collateral Conditions

Review Financial Statements Review Projections = Reality?


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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 Doesnt 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 Cs- 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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