©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Traditional Money Sources Banks Government loan programs Venture capitalists Investment bankers Money finders Other lending institutions 25.1 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Banks 25.2 Offers quickest and cheapest financing source Requires credit, collateral, or guarantee Requires personal cash investment Approves loan based on 5 Cs of lending Character Capital Capacity Collateral Conditions Prefers working capital loans Banks and risks do not mix. © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Rules for Working with Banks 25.3 Shop for banks Understand prime rate Understand demand deposits Understand loan contract Understand cross collateral Understand loan points Work to become bankable Establish rapport with banker © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Banker’s Checklist Business financial information  Past 3 years of balance sheet and income statement  Past 3 years of tax returns  Current balance sheet and income statement  Current accounts receivable  Current accounts payable  Inventory, furniture, fixture, and equipment lists  Pro forma balance sheet and income statement  Cash flow projections 25.4 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Banker’s Checklist Personal financial information  Personal financial statement  Personal tax returns, 3 years Other  Real estate or equipment appraisals  Buy-sell agreements  Copy of notes receivable Business plan 25.5 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Investment Bankers Fund raisers Raise money through Mergers and Acquisitions (M&As) Initial Public Offerings (IPOs) Selling stock to public Value business Set stock price Take fee and percent of stock offering Loans of $500,000 to $5 million 25.6 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Government Loan Programs Small Business Administration (SBA) Debt and asset loans Up to 85% guarantee 7(a) and 504 programs Small Business Investment Companies (SBIC) Licensed by SBA Minority Enterprise Small Business Investment (MESBIC) Same as SBIC State and local programs 25.7 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Venture Capitalists More than 1,000 VC firms 15% fund early stage companies High risk: high return (20 to 25% yearly over life of investment) Equity position/management position Pure injection of capital Need exit (IPO or stock) Qualifying ventures High gross marginsProprietary rights High technologyGrowth potential High profitsManagement team Resource: National Association Venture Capitalists 25.8 © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Alternative Money Sources Family and friends Professional advisors Angels Employees Bartering 25.9 Private placements Customers Factoring Suppliers Credit cards Strategic partnership Leasing companies Distribution rights Microloan programs © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Family and Friends Most common funding source Quick Easy Pledge assets Formal agreement Promissory note © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Angels Angels and angel networks Venture capital networks Passive investors Exit potential 3 to 5 times investment Debt and equity 1 million angels in U.S. 60% fund start-ups Tend to invest locally © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Factoring Short-term financing Receivable financing Third-party collection Select best accounts Risk bad debt recourse Credit and collection services Sell at discount (70% to 90% of receivables) No debt on balance sheet © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Strategic Alliances Partnering Corporate ventures Negotiated contracts Use capital and resources Make deal with prototype Technology transfer Percent of bottom line Corporate venture capital © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Suppliers Extended term financing Delayed payments Trade credit Forego discounts © 2004 Ewing Marion Kauffman Foundation

©2001 Kauffman Center for Entrepreneurial Leadership PLANNING AND GROWING A BUSINESS VENTURE™ ™ Leasing Company Lease equipment (specialized) Hard asset lender Assess leasing costs, penalties Service and insurance requires Two year business history Management expertise Credit worthiness © 2004 Ewing Marion Kauffman Foundation