Financing Your
Business
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Financing Your Business
Chapter 19
Financing Your
Business
19.1
Financing the Small Business
Start-Up
19.2
Obtaining Financing and
Growth Capital
2
Financing Your Business
19.1
Describe the resources available to
entrepreneurs to start their businesses.
Compare and contrast sources of financing for
start-up ventures.
Describe the importance of financial planning.
Section 19.1 Financing the Small Business Start-Up
3
Financing Your Business
19.1
Entrepreneurs use their creative talents to secure
necessary resources to start their businesses.
Most start-up funds come from an entrepreneur’s
personal resources; however, there are other
common sources of funding.
Section 19.1 Financing the Small Business Start-Up
4
Financing Your Business
19.1
bootstrapping
factor
equity capital
equity
risk capital
angel
Section 19.1 Financing the Small Business Start-Up
venture capital
venture capitalists
debt capital
operating capital
line of credit
trade credit
5
Financing Your Business
Entrepreneurial Resources
One of the unique talents of entrepreneurs is
finding the resources to launch a business requires
the understanding of:
Short-term needs, those associated with
activities not part of normal operations
Long-term capital needs, relating to preparation
for future growth.
Section 19.1 Financing the Small Business Start-Up
6
Financing Your Business
Bootstrapping
Most entrepreneurs get
their businesses started by
bootstrapping.
Section 19.1 Financing the Small Business Start-Up
bootstrapping
operating a business as
frugally as possible and
cutting all unnecessary
expenses, such as
borrowing, leasing, and
partnering to acquire
resources
7
Financing Your Business
Bootstrapping
Bootstrapping involves:
hiring as few employees as possible
leasing anything you can
being creative
Section 19.1 Financing the Small Business Start-Up
8
Financing Your Business
Bootstrapping
Bootstrapping
entrepreneurs can also ask
suppliers to allow for longer
payments terms, ask
customers to pay in
advance, or sell their
accounts receivable to a
factor.
Section 19.1 Financing the Small Business Start-Up
factor an agent who
handles an
entrepreneur’s accounts
receivable for a fee
9
Financing Your Business
Start-Up Money
The main sources for start-up money for
entrepreneurs include:
friends
family
other resources, such as savings, credit
cards, loans, and investments
Section 19.1 Financing the Small Business Start-Up
10
Financing Your Business
Financing the Start-Up
Some sources of financing include:
banks
finance companies
investment companies
government grants
Section 19.1 Financing the Small Business Start-Up
11
Financing Your Business
Sources of Equity
Financing
To obtain equity capital as
a source of funding for a
business, the owner must
give equity to obtain the
financing.
Section 19.1 Financing the Small Business Start-Up
equity capital cash
raised for a business in
exchange for an
ownership stake in the
business
equity capital an
ownership in a business
12
Financing Your Business
Sources of Equity
Financing
Equity funding is
sometimes called risk
capital.
Section 19.1 Financing the Small Business Start-Up
risk capital money
invested in companies
where there is financial risk
13
Sources of Equity Financing
Personal
savings
Statesponsored
venture
capital
funds
Friends and
family
Forms of
Equity
Financing
Venture
capitalists
Section 19.1 Financing the Small Business Start-Up
Private
investors
Partners
14
Financing Your Business
Sources of Equity
Financing
An angel often invests
because of his or her belief
in a business concept and
the founding team.
Section 19.1 Financing the Small Business Start-Up
angel a private,
nonprofessional investor,
such as a friend, a relative,
or a business associate,
who funds start-up
companies
15
Financing Your Business
Sources of Equity
Financing
An existing business can
use venture capital
financing to raise large
amounts of money to
achieve its goals.
Section 19.1 Financing the Small Business Start-Up
venture capital a source
of equity financing for
small businesses with
exceptional growth
potential and experienced
senior management
16
Financing Your Business
Sources of Equity
Financing
Venture capitalists often
provide managerial and
technical expertise to small
businesses.
Section 19.1 Financing the Small Business Start-Up
venture capitalists
individual investors or
investment firms that
invest venture capital
professionally
17
Financing Your Business
Sources of Debt Financing
Sources of debt capital are
far more numerous than
sources of equity capital,
but the entrepreneur must
be certain the business can
generate enough cash flow
to repay the loan.
Section 19.1 Financing the Small Business Start-Up
debt capital money
raised by taking out loans,
which must be repaid with
interest
18
Sources of Debt Financing
Banks
Small
business
investment
companies
Trade credit
Sources of
Debt
Financing
SBA loans
Section 19.1 Financing the Small Business Start-Up
Minority
enterprise
development
programs
Commercial
finance
companies
19
Financing Your Business
Sources of Debt Financing
Banks were once the
primary source of
operating capital, but
today they are much more
conservative in their lending
practices.
Section 19.1 Financing the Small Business Start-Up
operating capital money
a business uses to support
its operations in the short
term
20
Financing Your Business
Sources of Debt Financing
An established business
can usually get a line of
credit from a bank, which it
can borrow against.
Section 19.1 Financing the Small Business Start-Up
line of credit an
arrangement whereby a
lender agrees to lend
up to a specific amount
of money at a certain
interest rate for a
specific period of time
21
Financing Your Business
Sources of Debt Financing
Some businesses may
seek trade credit from
other companies in their
industry as a form of debt
financing.
Section 19.1 Financing the Small Business Start-Up
trade credit credit one
business grants to
another business for the
purchase of goods or
services; a source of
short-term financing
provided by one
business within another
business’s industry or
trade
22
Financing Your Business
Financial Planning for
Your Business
Financial planning involves finding the right kind
of financial resources at the right time in the right
amount.
Section 19.1 Financing the Small Business Start-Up
23
Financing Your Business
Financial Planning for
Your Business
Financial planning involves:
Identifying the stages of growth in your
business
Identifying milestones that require resources
Identifying business advisers
Hiring an excellent management team
Section 19.1 Financing the Small Business Start-Up
24
Financing Your Business
19.1
1. Describe the resources available to
entrepreneurs to start their business.
Most entrepreneurs start their businesses by
bootstrapping or using personal resources such
as friends, family, savings, credit cards, loans,
and investments.
Section 19.1 Financing the Small Business Start-Up
25
Financing Your Business
19.1
2. Compare and contrast sources of financing
for start-up ventures.
Entrepreneurs have two options: equity or debt financing. Equity
sources trade cash for some portion of ownership, or equity, in a
business. With debt financing, an entrepreneur borrows money and
repays it with interest, and retains full ownership of the business.
However, the loan must be carried as a liability on the business’s
balance sheet. For this approach to be successful, your business
must generate enough cash flow to repay the loan.
Section 19.1 Financing the Small Business Start-Up
26
Financing Your Business
19.1
3. Describe the importance of financial
planning.
Financial planning provides you with a better
chance of securing the money you need when
you need it in the right amount.
Section 19.1 Financing the Small Business Start-Up
27
Financing Your Business
19.2
Describe the information needed to obtain
financing.
Explain the types of growth financing
available to entrepreneurs.
Describe how to calculate start-up capital
requirements.
Section 19.2 Obtaining Financing and Growth Capital
28
Financing Your Business
19.2
Additional sources of funding become available
when entrepreneurs are ready to grow their
businesses.
Entrepreneurs must calculate their start-up needs
so they can communicate this information to
potential funders.
Section 19.2 Obtaining Financing and Growth Capital
29
Financing Your Business
19.2
pro forma
character
capacity
capital
collateral
conditions
Section 19.2 Obtaining Financing and Growth Capital
due diligence
private placement
initial public offering (IPO)
stock
working capital
contingency fund
30
Financing Your Business
How to Obtain Financing
To obtain financing, you
must create pro forma
financial statements to
include in your business
plan.
Section 19.2 Obtaining Financing and Growth Capital
pro forma proposed or
estimated financial
statements based on
predictions of how the
actual operations of the
business will turn out
31
Financing Your Business
What Venture Capitalists
Expect
Venture capitalists rarely invest in start-up
companies, but when they do, they expect:
A 30 to 70 percent return on their investment
for start-ups
A 50 percent or more return for an early
stage venture
A business with good management
Section 19.2 Obtaining Financing and Growth Capital
32
Financing Your Business
What Private Investors
Expect
Private investors, or angels, expect:
businesses they understand
investing with like-minded investors
ten times their investment at the end of five
years
a strong management team
Section 19.2 Obtaining Financing and Growth Capital
33
Financing Your Business
What Bankers Expect
Commercial lenders like banks rely on the five Cs
to determine the acceptability of a business loan
applicant:
C
Character
C
Capacity
C
Capitol
C
Collateral
C
Conditions
Section 19.2 Obtaining Financing and Growth Capital
34
Financing Your Business
What Bankers Expect
A bank must believe in
the character of the
entrepreneur.
Section 19.2 Obtaining Financing and Growth Capital
character a borrower’s
reputation for fair and
ethical practices,
including business
experience, dealings with
other businesses, and
reputation in the
community
35
Financing Your Business
What Bankers Expect
Banks consider the
capacity of a business to
pay its debts.
Section 19.2 Obtaining Financing and Growth Capital
capacity the ability of a
business to pay a loan in
view of its income and
obligations
36
Financing Your Business
What Bankers Expect
Banks place a strong
emphasis on whether a
business has a financially
stable capital structure.
Section 19.2 Obtaining Financing and Growth Capital
capital the net worth of
a business, the amount
by which its assets
exceed its liabilities
37
Financing Your Business
What Bankers Expect
Banks are more likely to
lend to businesses with
valuable collateral.
Section 19.2 Obtaining Financing and Growth Capital
collateral security in the
form of assets that a
company pledges to a
lender
38
Financing Your Business
What Bankers Expect
Banks consider all the
conditions in which the
business operates.
Section 19.2 Obtaining Financing and Growth Capital
conditions the
circumstances at the time
of the loan request,
including potential for
growth, amount of
competition, location,
form of ownership, and
insurance
39
Financing Your Business
Types of Growth Financing
If your company has established a successful
track record, there are other types of financing
available, including:
venture capital (VC) companies
private placements
initial public offerings (IPOs)
Section 19.2 Obtaining Financing and Growth Capital
40
Financing Your Business
Venture Capital (VC)
Companies
If a VC firm is interested
in funding your business
and decides you have a
sound business plan, it
will begin due diligence.
Section 19.2 Obtaining Financing and Growth Capital
due diligence the
investigation and analysis
a prudent investor does
before making business
decisions
41
Financing Your Business
Private Placements
Private placement is a
way to raise capital by
selling ownership interests
in your private corporation
or partnership.
Section 19.2 Obtaining Financing and Growth Capital
private placement a
private offering or sale of
securities directly to a
limited number of
institutional investors who
meet certain suitability
standards; ownership
interests are called
securities
42
Financing Your Business
Initial Public Offerings
(IPOs)
An initial public offering
(IPO) is a popular way to
raise a lot of money for
growth since all proceeds
go to the company.
Section 19.2 Obtaining Financing and Growth Capital
initial public offering
(IPO) the sale of stock in
a company on a public
stock exchange
43
Financing Your Business
Initial Public Offerings
(IPOs)
The CEO of a company
that has made an IPO is
primarily responsible to the
people who own the
company stock.
Section 19.2 Obtaining Financing and Growth Capital
stock a type of security
that signifies ownership in
a corporation and
represents a claim on part
of the corporation’s
assets and earnings
44
Financing Your Business
Initial Public Offerings
(IPOs)
There are five steps to become a public company
with stock for sale on a public exchange.
1.
2.
3.
4.
5.
Choose an underwriter or investment banker.
Draw up a letter of intent.
File a registration statement with the SEC.
Announce the offering in the financial press.
Do a road show.
Section 19.2 Obtaining Financing and Growth Capital
45
Financing Your Business
Calculating Your Start-Up
Capital Needs
You will need to calculate exactly how much
money you will need to start or grow your
business.
This requires estimating start-up costs, capital
expenditures, working capital (operating costs),
and contingency funds.
Section 19.2 Obtaining Financing and Growth Capital
46
Financing Your Business
Start-Up Costs
Start-up costs are those costs you incur before
you start a business.
Section 19.2 Obtaining Financing and Growth Capital
47
Financing Your Business
Start-Up Costs
Start-up costs may include:
furniture, fixtures, and equipment
promotion expenses and office supplies
fees and licenses
Section 19.2 Obtaining Financing and Growth Capital
48
Financing Your Business
Operating Costs
Operating costs, often
referred to as working
capital, cover the time
between selling your
product or service and
receiving payment from the
customer.
Section 19.2 Obtaining Financing and Growth Capital
working capital the
amount of cash needed to
carry out the daily
operations of a business
that ensures a positive
cash flow after covering
all operating expenses
49
Financing Your Business
Contingency Funds
Since no one can predict
the future, you should
include a contingency
fund in your start-up
calculations.
Section 19.2 Obtaining Financing and Growth Capital
contingency fund an
extra amount of money
that is saved and used
only when absolutely
necessary, such as for
unforeseen business
expenses
50
Financing Your Business
19.2
1. Describe the information needed to obtain
financing.
After identifying potential sources of investors, you
need to prepare estimated financial statements
based on predictions of how the actual operations of
a business will turn out. Your financial plan must
include income statements, cash flow statements,
and balance sheets.
Section 19.2 Obtaining Financing and Growth Capital
51
Financing Your Business
19.2
2. Explain the types of growth financing
available to entrepreneurs.
Venture capital (VC) companies are unlikely sources but may
be an option to companies with a proven concept and a huge
growth potential. Private placement is a way to raise capital
by selling ownership interests in a private corporation or
partnership. Initial public offerings (IPOs) are sales of stock in
a company on a public stock exchange.
Section 19.2 Obtaining Financing and Growth Capital
52
Financing Your Business
19.2
3. Describe how to calculate start-up capital
requirements.
Entrepreneurs can figure start-up costs by talking to suppliers,
vendors, manufacturers, distributors, and others in their industry.
Entrepreneurs need to figure capital expenditures, which are
costs to purchase equipment and facilities. Next, entrepreneurs
need to calculate working capital, how much cash is needed to
carry out daily operations. Finally, they must figure contingency
funds, extra money used for unforeseen business expenses.
Section 19.2 Obtaining Financing and Growth Capital
53
Financing Your Business
Technology Enabled
Marketing
Technology enabled marketing (TEM) ties all of a business’s
departments, such as sales, production, and marketing,
together so they can all work from the same pool of data.
Sales force automation and online customer service are
forms of TEM.
Section 19.2 Obtaining Financing and Growth Capital
54
Financing Your Business
Tech Terms
online customer service
the service businesses provide to customers via the Internet
sales force automation
tools that automate the business tasks of sales, such as order
processing, contact management, lead tracking, and inventory control
Section 19.2 Obtaining Financing and Growth Capital
55
End of
Financing Your
Business
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