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Financing Your Business

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Presentation on theme: "Financing Your Business"— Presentation transcript:

1 Financing Your Business
Business Management

2 Today’s Objectives Explore differences among various sources of capital. Identify the cost of operations.

3 Methods of Obtaining Capital
Equity Capital Debt Capital

4 Owner Capital The owner(s) personal contributions to the business
May come from personal savings or personal loans Small businesses rely heavily on owner capital Also known as equity capital

5 Retained Earnings Also a type of equity capital because business profits belong to the owner(s) Business profits saved for use by the business in the future

6 Debt Capital Money that others loan to a business
Also known as creditor capital Banks & other lenders usually will NOT lend to a business unless the equity capital exceeds the debt capital

7 Obtaining Equity Capital
Remember those business structures?

8 Sole Proprietorship Invest more personal funds
Sell personal assets to raise $$$ Mortgage personal property Assets used as securities are at risk if the business fails. Other personal assets at risk Change business structure Partnership Corporation

9 Partnership Partners usually invest personal resources in the business in order to balance/share risk. Not mandatory for new partners A formal partnership agreement identifies the financial contributions of each partner and how profits will be shared. If the assets of one partner are not enough to cover business debts, assets from other partners can be taken. Owner gives up individual control over management and decision-making.

10 Corporation Can raise capital quickly because the amount of money invested is much smaller Stockholders are not involved in day-to-day management of business. Investors are protected financially.

11 Obtaining Debt Capital

12 Short-Term Debt Capital
Must be repaid within a year Often 30-, 60-, or 90-day loans Usually obtained from a bank or other lending institutions

13 Short-Term Debt Capital
Business must supply bank with adequate financial information. Bank usually obtains a financial report on the business from a credit company. If the bank considers the business to be a good credit risk, the bank will grant a loan or a line of credit. Specific amount, set time period Business owner(s) must sign a promissory note. Unconditional written promise to pay the lender a certain sum of money at a particular time or on demand

14 Long-Term Debt Capital
Money borrowed for longer than a year Usually obtained through: Long-term notes Bonds

15 Term Loans Also known as long-term notes; medium- or long-term financing used for business operations or for improving fixed assets Written for periods from 1 to 15 years … or longer Significant source of capital for most businesses Banks / lenders require the principal and interest to be repaid on a regular basis over the life of the note.

16 Bonds Long-term written promise sold by the business to investors that promises payment of a definite sum of money at a specified time Business receives the amount of the bond when it is initially sold. Must pay bondholder the borrowed amount (principal) at the bond’s maturity date Business pays bondholder interest at a specified rate at certain intervals Bonds do NOT represent a share of ownership; they are investments. Bondholders are creditors & have priority claim before stockholders.

17 Obtaining Capital 3 things to consider…

18 Cost of Capital Costly to sell bonds, long-term notes, or issue stock
Must file forms, obtain approval, make agreements, find buyers Usually only large or highly successful firms even consider stocks/bonds

19 Interest Rates Rates fluctuate monthly, weekly, even daily
Best to borrow when rates are low (cheaper) When rates are high, businesses usually borrow short-term debts.

20 Influence of Contributors
Short-term creditors usually have no control over management and operations of business. Long-term credit agreements are tied to asset claims & may impose limitations on those assets. Partners / stockholders gain a voice in control of business.

21 Sources of Capital Where do you get the money?

22 Sources of Capital Banks - most popular source of outside capital
Small Loan Companies - firms that lend money to “higher risk” business and individuals Venture Capitalists People or companies that lend large sums of money to promising new or growing businesses Usually ask for a percentage of ownership rights in the company Demand a carefully developed business plan that shows high potential for success

23 Sources of Capital Commercial Credit Companies - lend money on current assets, such as accounts receivable Sales Finance Companies - used primarily when installment sales are involved Insurance Companies - portions of funds collected from policy holders may be loaned to firms Individual Investors / Investment Groups Pension Funds - retirement funds collected from employees may be loaned to firms

24 Sources of Capital Investment Banking Organizations
Specialize in selling new security issues to the public Helps a business raise large sums of capital through stocks / bonds Can assist a rapidly growing, privately held company with IPO Equipment Manufacturers Firms that do not lend money, but sell needed equipment on an extended-time payment plan

25 Review! 2 Methods of Obtaining Capital Types of Debt Capital
3 Things to Consider when Obtaining Capital 10 Sources of Capital

26 So how much money do you need?
Physical Location Cost of Product / Service Rent / mortgage Facility maintenance Utilities Transportation Wages & Salaries Equipment Supplies Raw Materials Inventory

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