1. OTHER FINANCING ALTERNATIVES
ENTREPRENEURIAL FINANCE
Leach & Melicher
Chapter 13
OTHER FINANCING ALTERNATIVES
© 2003 South-Western College Publishing

2. CHAPTER 13 : LEARNING OBJECTIVES
Identify relevant sources of debt-oriented financing
Discuss government loan guarantee and microcredit programs
Identify several potential sources of funding for minority-owned enterprises

3. CHAPTER 13 : LEARENING OBJECTIVES
Explain what differentiates venture lending and leasing from traditional lending and leasing
Describe factor financing and compare it to receivables financing through a bank

4. HELPING START-UP VENTURES LOCATE FUNDING
Facilitators
Consultants
Intermediaries

5. Commercial v. Venture Bank Lending
Commercial Bank:
Use traditional conservative measures of borrower’s ability to repay and value of assets recovered in case of default
Venture Banks
Interest and principal represent only part of return to Venture Lender
Warrants (right to buy equity at a specific price) provide remainder of return

6. FIVE “C’s” OF CREDIT ANALYSIS
Capacity to repay – most critical
Capital – money you personally have personally invested in business; indication of extent of personal risk if business fails
Collateral – additional forms of security or guarantees provided to lender

7. FIVE “C’s” OF CREDIT ANALYSIS
Conditions – focus on the intended purpose of the loan
Character – general impression you make on the potential lender or investor

8. COMMON LOAN RESTRICTIONS
Maintenance of accurate records and financial statements
Limits on total debt
Restrictions on dividends or other payments to owners and /or investors
Restrictions on additional capital expenditures

9. COMMON LOAN RESTRICTIONS
Restrictions on sale of fixed assets
Performance standards on financial ratios
Current tax and insurance payments

10. WHY VENTURES MAY NOT GET DEBT FINANCING
Large portion of startup assets are intangible and provide no collateral
Receivables either don’t yet exist or collection history is inadequate
Not economically plausible for bank to use management involvement in a defaulting new venture
Risk characteristics not a good match to demand deposits or other bank liabilities

11. USE OF CREDIT CARD FINANCING DUE TO:
Ease of obtaining credit card debt
Potential low cost when rolling balance across various cards
Personal guarantees required on regular bank loans

12. SMALL BUSINESS ADMINISTRATION (SBA)
Created by an act of Congress for the purpose of fostering the initiation and growth of small businesses
Provides capital and credit
Guarantees general business loans
Helps create new jobs in small business
Makes investments through venture capital programs

13. SMALL BUSINESS ADMINISTRATION (SBA)
Provides disaster loans
Works with regulatory agencies
Helps small firms obtain government business
Provides management and technical assistance
Implements asset sales programs

14. SMALL BUSINESS ADMINISTRATION (SBA) Programs
Debt financing and other financing-related programs
Surety bond program
Federal procurement programs
Research and development
Business counseling & training
Business information services

15. SMALL BUSINESS ADMINISTRATION (SBA) Programs
Advocacy programs
Disaster assistance
Assistance for armed forces veterans
Assistance for exporters
Assistance for native Americans
Assistance for small and disadvantaged businesses
Assistance for women

16. RECEIVABLE LENDING AND FACTORING
Factoring – selling receivables to a third party at a discount from their face value
Receivables lending – use of receivables as collateral for a loan

17. DEBT, DEBT SUBSTITUTES, AND DIRECT OFFERINGS
Vendor financing: Accounts payable and trade notes
* Terms “2 in 10, net 30”
Mortgage lending
Venture leasing – leases of equipment and other assets where lessor takes an equity interest (thru warrants) in venture
Direct public offerings- security offering made directly to a large number of investors