Chapter 14 – Raising Capital  Learning Objectives  Describe the life cycle of a business  Explain funding process and relationship of angels and venture capitalists to business  Enumerate bank loans vs. bonds vs. equity  Examine commercial paper and banker’s acceptance  Understand funding sources at different times  Describe options and regulations when closing a business

Business Life Cycle  Business Life Cycle  Infancy (start-up of business)  Youth (growth phase)  Maturity (stable business)  Old Age (decline of business)  Death (termination of business  Fact Check  3 out of 5 employer businesses fail in first six years  Each cycle presents different financing choices

Borrowing for a Start-up  Five Main Sources  Personal Funds  Borrowed from Family and Friends  Commercial Banks  Small Business Association (SBA Funds)  Angel or Venture Capitalist  SBA  7(a) Loan Guaranty Program  Administers to individuals that might not qualify from a commercial bank directly…still a commercial bank loan  Guaranty is to bank for loan…  Angel Financing or Venture Capitalist  Sequential funding  Careful of exit strategies

Borrowing for a Stable Business  Commercial Banks  Straight Loan (Example 14.2)  Discount Loan (Example 14.3)  Letter of Credit (Example 14.4)  Compensating Balance (Example 14.5)  Large Firm Options  Selling Bonds  Selling Stocks  Regulations for Bonds and Stocks  Glass-Steagall Act of 1932  Banking Act of 1933  Securities Act of 1933  Securities Exchange Act of 1934

Selling Stock  Approval from SEC  Request authorization  Provide specific information to SEC  Approves sale does not make a buy recommendation  Investment Banker  Hired as “partner” in process for expertise and contacts  Must conduct “due diligence” prior to sale  Compensated by spread on securities sale  Best efforts  Firm Commitment  Documents  Registration  Prospectus  Letter of Comment  Tombstone for Advertising the sale

Selling Stock  Road Show  Meet potential buyers  Provide essential information on company, industry, and market  Assess potential of issue  Auction  Price set, auction for quantity  Over and Under subscribed issues  Over subscribed – pro rata share distribution  Under subscribed – depends on investment banker payment  Aftermarket – Trading on NASDAQ  Lock-up Agreement (owners can not sell immediately)

Other Borrowing Options  Commercial Paper  Short term borrowing, maturity less than 270 days  Offered directly by company to “public”  Standard size is $100,000 face value  Discount note  Banker’s Acceptance  Typically finances self-liquidating inventories  Post dated check sponsored by a commercial bank  Allows “local” company to deal with banks and companies out of their area through their “local” bank

Closing the Business  Successful business  Sells of assets  Distributes funds to lenders and owners  Unsuccessful business -- Bankruptcy  Chapter 7  Straight Liquidation (Business is over)  Chapter 11  Reorganization (Business needs to reorganize to compete)  Reorganization plan filed in court  Court oversees process  Claimants have voice and vote in plan  Most Chapter 11s eventually turn into Chapter 7