Presentation on theme: "Debt Funding In 23 slides 1. Key topics When is debt financing a bad idea for a start- up? What are alternative sources of debt? How do bank and non-bank."— Presentation transcript:
Cash conversion cycle in English A business gets inventory from a supplier so it has something to sell When the order is placed, the business gets inventory on its current assets and accounts payable on its current liabilities The business tries to turn the inventory into cash before it needs to repay its supplier If not, business has a positive cash conversion cycle that will require it to borrow $ for working capital 16
Compare Owen to Flo Owen Banksmore has negotiated repayment of his credit from suppliers to be an average of 30 days. He is able to sell the inventory he gets from suppliers, on average, about 60 days. He sold his inventory to his customers on credit; his company takes an average of 60 days to turn its accounts receivables into cash. Conversely, Florence "Flo" B. Chillin has negotiated superior credit repayment terms from her suppliers - 90 days! - and is faster at getting inventory off her store's shelves, averaging 30 days. She gets her customers, who also purchase on credit, to repay their borrowings in 30 days. As the graphic shows below, Flo's working capital management practices give her a working capital cycle of -30 days, while Owen's practices yield a WC cycle of 90 days. Flo has more cash to fuel growth and does not need to finance her business' growth with other sources of cash. 18
How SBA loans work Small Business Administration (SBA) approves lenders for small business loans Small businesses go to approved lenders to apply for loans Repayment and interest rates of SBA loans are negotiated between a borrower and SBA-approved lender Lender receives principal and interest on loan from borrower SBA guarantees repayment of 90% of loan if borrower defaults, so lender is more likely to make loan
SBA loans SBA’s 7(a) loan is its most common loan program provides loans to businesses — not individuals — requirements of eligibility are based on aspects of the business, not the owners loan proceeds may be used to establish a new business or to assist in the acquisition, operation, or expansion of an existing business specific terms of SBA loans are negotiated between a borrower and an SBA-approved lender
Summary There are several tools you can use besides simply taking out a loan – Line of credit – Negotiations with suppliers – Trade credit – Faster accounts receivable cycle – Faster inventory to sales cycle An SBA loan is helpful if your business has a financial track record 23
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