1. Entrepreneurship Canadian Edition William D
Entrepreneurship Canadian Edition William D. Bygrave, Andrew Zacharakis, Sean Wise

2. DEBT AND OTHER FORMS OF FINANCING
Chapter 12

3. Learning Objectives
Getting Access to Funds—Start with Internal Sources
Learning Objective 12.1 Describe some of the first places entrepreneurs should seek funding.
Cash Conversion Cycle
Learning Objective 12.2 Explain what the cash conversion cycle is.
Working Capital: Getting Cash from Receivables and Inventories
Learning Objective 12.3 Explain what working capital is.
Using Accounts Receivable as Working Capital
Learning Objective 12.4 Explain how accounts receivable is used as working capital.
Sources of Short-Term Cash: More Payables, Less Receivables
Learning Objective 12.5 Identify the sources of short-term cash for entrepreneurs.
Obtaining Bank Loans Through Accounts Receivable Financing
Learning Objective 12.6 Explain how entrepreneurs can obtain loans through accounts receivable financing.

4. Learning Objectives (continued)
Other Loans and Financing
Learning Objective 12.7 Identify the ways entrepreneurs can use inventory to secure loans.
Short-Term Financing
Learning Objective 12.8 Describe the traditional short-term bank loan for entrepreneurs.
Equipment Financing
Obtaining Early Financing from External Sources
Learning Objective 12.9 Identify the early sources of external financing available to entrepreneurs.
Planning Cash Flow and Planning Profits
Learning Objective Differentiate between cash flow and profit.

5. Financing Is A Continuing Activity
Factors within, and outside of, your control impact your cash needs & can change suddenly
Cash needs must be frequently forecasted with a margin of error
Plan for the most likely case
Be prepared for the worst case (maintain access to a reserve)
Remember the 3 “Rules of Cash”
More cash is better than less cash
Cash now is better than cash later
Never run out of cash (#1 killer of new ventures!)

6. Align Your Sources And Uses Of Funds
Start-up costs
Working capital
Growth
Sources of funds (cash flow)
External
Require external analysts or investors to independently appraise the worthiness of capital investments before releasing funds
Internal
Funds you control directly & absolutely
Forecast uses of funds further out than the time required to secure sources of funds

7. Mature Firms Enjoy Greater Access To Funds
FIRM MATURITY
INTERNAL SOURCES OF FUNDS
EXTERNAL SOURCES OF FUNDS

8. Start With Internal Funds Sources
Home equity lines of credit
Interest rates are comparatively low
Better for mid to longer term debt
Credit cards
Higher interest rates
Miles/points may be available
Better for short term debt to minimize cost of capital
Use personal funds to “de-risk” your venture
Confirm/deny market demand
Confirm/deny your value proposition
Create conditions needed to access other fund types

9. Optimize Your Cash Collection Cycle (CCC)
Ideal - a negative cycle
Customer pays you before you pay suppliers
Highest liquidity
Next best – Customers pay cash, you pay credit
Influenced by industry norms
Optimize your CCC
Extend payables
Shorten receivables
Minimize inventory costs

10. Obtain Working Capital From Receivables And Inventories
New working capital doesn’t equal liquidity
Some working capital is tied up in operating assets
Operating assets can be liquidated prematurely at a cost, if no other sources of funds exist.

11. Obtain Working Capital From Receivables By Adjusting…
the pattern of your sales
Forecast sales to plan working capital
the ratio of cash vs. credit
Credit vs. credit cards vs. cash
your terms for credit sales
A competitive factor within industries
Consider demand elasticity
Length of payment & discounts
your way of enforcing your credit terms
Cutting off vs. cash-only vs. collection agencies vs. legal recourse

12. Increase Payables And Decrease Receivables For Short Term Cash
Receivables secure a bank loan
Maximize existing trade credits
Negotiate extended trade credits
Use seasonal trade credits
Emphasize cash sales
Accept credit cards

13. Get Short Term Cash From Banks By Financing Receivables
Pledging
Receivable become collateral
Loan is given for a percentage of collateral full value
Pledging with notification
Customer instructed to pay the lender directly
Factoring
Sell receivables at a discount to a “factor”
Factor collects receivable payments
Recourse
Means the factor can still get receivables payments from your customers don’t pay.
Re-course & non-recourse exists.

14. Obtain Working Capital With Bank Loans Against Inventory
Chattel Mortgage
Secured by property assets (i.e. “Widget #2873B4”)
Floating Lien
Secured by blanket assets (i.e. entire inventory)
Field Warehousing
Lender secures your inventory on your premises
Public Warehousing
Your pledged inventory goes to another warehouse
NOTE: You retain inventory access d

15. “Finance” Working Capital Through Customer Prepayments
Goes back to the ideal negative cycle...not easy
Common in large, complex, long-term projects
Customers pay ahead in installments to fund phases of work until completion

16. Obtain NGO loans For those unable to get conventional bank loans
Government backs loans
Must be for-profit
Used for working capital, CAPEX, & line of credit
3:1 Debt-to-equity ratio required
Must be under 36

17. Many Factors To Consider In Acquiring Short Term Bank Loans
Maturity of loans
Interest rates
Collateral
Loan applications
Restrictive covenants
General provisions
Routine provisions
Specific provisions

18. Finance Equipment Needs
Non-bank companies charge interest higher than banks
Collateral (i.e. the equipment) must exceed loan balance
Loan repayment schedule stays ahead of depreciation schedule
Conditional sales contracts extend purchase over 2-5 years

19. When Selecting The Right Short-term Financing Mix, Consider…
your needs
Current
Future
cost of alternatives

20. Plan Cash Flows And Profits
Profitability vs. Solvency
An unprofitable venture can recover…measure of health
An Insolvent venture ceases to exist because it cannot pay its’ suppliers (insufficient working capital)…vital sign
Profits doesn’t equal cash flow
Some cash transactions do not impact profits
Non-cash transaction do not impact cash flow
Free cash flow (FCF); matters to bank loan officers
= Cash from operations (CFO) – capital expenditures (CAPEX)
Pretax undedicated cash flow; matter to acquirers
= FCF + TAX + INTEREST

21. Case: FEED Resource Recovery
Is feed an opportunity?
Where can Shane raise the necessary money to build the prototype?
What are the implications on valuation for the different sources?

22. Recap Working capital doesn’t equal liquidity
Most of working capital is tied up in operations
Cash flow forecasts help to determine financing needs
Manage customer and supplier payments
Debt options when actual cash doesn’t meet needs: banks, private placement, leases, suppliers, government agencies, customers

23. COPYRIGHT
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