Sources of Financing: Debt and Equity


Sources of Financing: Debt and Equity

If you don’t know who the fool is on the deal, it’s you!

...Michael Wolff

Planning for Capital Needs

    Capital : any form of wealth employed to produce more wealth Fixed capital : to purchase a company’s permanent or fixed assets such as land, buildings, computers, and equipment Working capital : to support a business’s short-term operations Growth capital : to finance a company’s growth or its expansion in a new direction

Equity vs Debt Capital

  Equity capital company : represents the personal investment of the owner (s) of a Debt capital : the financing that a small business owner has borrowed and must repay with interest

Sources of Equity Capital

       Personal savings Friends and family members Angels Partners Corporate venture capital Venture capital companies Public stock sale


      Private investors , wealthy individuals, entrepreneurs themselves, who provide money in exchange for equity stakes Ranging from $10,000 to $2M Every year: 230,000 angels , $23 B, 50,000 companies Average: 10% of opportunities, 2 investments per year, $80,000 in 3.5 firms Angel networks : 200 Patient money

Venture Capital Companies

$3-10M  Competent management     Competitive edge Growth industry Viable exit strategy Intangible factors

Public Stock Sale

Advantages  Ability to raise large amounts of capital  Improved corporate image    Improved access to future financing Use of stock for acquisitions Listing on a stock exchange

Public Stock Sale

Disadvantages   Dilution of ownership Loss of control       Loss of privacy Reporting to SEC Filing expenses Accountability to shareholders Pressure for short-term performance Demands of time and timing

Debt Financing

     Commercial banks Non-banks Federally-sponsored programs State and Local Development Programs Internal methods of financing

Commercial Banks

  Short-term loans Commercial loans Lines of credit Floor-planning Intermediate and long-term loans Installment loan Term loan

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Non-Bank Sources

Asset-based lenders Vendor financing Equipment suppliers Commercial finance companies Savings and loan associations Stock brokerage houses Insurance companies Credit unions Bonds Private placements Small business investment companies Small business lending companies

Federally Sponsored Programs

     

Economic Development Administration Department of Housing and Urban Development Department of Agriculture’s Rural Cooperative Service Small Business Innovation Research Program Small Business Technology Transfer Program Small Business Administration

Small Business Administration

         Low Doc Loan Program SBA Express Program 7A Loan Guaranty Program CAPLine Program Loans Involving International Trade Section 504 Certified Development Company Program Microloan Program Prequalification Loan Program Disaster Loans

State and Local Loan Development Programs   Capital access programs : encourages lending institutions to make loans to businesses that do not qualify for traditional financing because of higher risk Revolving loan funds rates : offered by communities that combine private and public funds to make loans to small businesses, often at below-market interest

Internal Methods

   Factoring accounts receivable Leasing Credit cards