2. 11
Chapter
Sources of Capital

3. Overview
Debt Financing- Interest-Bearing Instrument Requiring Collateral (Asset)
Equity Financing- Investor Receives Ownership Position
Financing Usually A Combination Of Debt And Equity

4. Factors Affecting Type Of Financing
Availability of Funds
Assets of Venture
Prevailing Interest Rates
All Financing Requires Some Level of Equity

5. Internal Funds Profits Sale of Assets- Rent Instead Of Purchase
Working Capital Reduction
Extended/Discounted Payment Terms- Suppliers
Accounts Receivable- Speed Up Collection
Reduction of:
Inventory
Cash
Working Capital Items

6. External Funds Self Family & Friends Suppliers & Trade Credit
Commercial Banks
Government Loan Programs
R & D Limited Partnerships
Venture Capital
Private Equity Placements
Public Equity Offerings
Other Government Programs

7. Personal Funds
Essential To Attract Outside Capital- Indicates Owner Commitment, % Of Personal Assets
Sources:
Savings
Life Insurance
House/Car Mortgage

8. Family & Friends Requires Knowledge Of Entrepreneur
Disadvantage- Direct Input Into Operations
Advantage- Often More Patient
Must Be Done In Business-Like, Written Manner With Terms, etc.
Will Loss Have Severe Financial Impact On Family/Friends?

9. Private Placement
Formalized Method For Obtaining Funds From Private Investors
Regulation D- Governs Private Offerings
Broad Provision To Simplify
Defines Private Offering
Specific Operating Rules

10. Commercial Banks Bank Loans- Asset Based Cash Flow Financing
Accounts Receivable
Inventory
Equipment
Real Estate
Cash Flow Financing
Installment
Straight Commercial
Long-Term
Character

11. Lending Decisions
Based On Quantifiable Information & Subjective Judgment
Five “C’s”
Character Collateral
Capacity Conditions
Capital
Review Financial Statements
Review Projections = Reality?

12. Lending Questions Does Entrepreneur Expect To Be Carried By Loan?
Is Entrepreneur Committed To Spend Effort To Succeed?
Business Have Unique Advantage?
Downside Risks?
Protection Against Disasters?

13. Bank “Shopping” Process
Complete Business Plan & Application
Evaluate Several Alternative Banks
Select One With Positive Experience in Business Area
Set Appointment
Present Case/Plan
Borrow Maximum Amount Possible

14. SBA Financing When Entrepreneur Doesn’t Have: SBA-Guarantee For:
Track Record
Assets
SBA-Guarantee For:
Working Capital
Machinery/Equipment
Furniture/Fixtures
Land/Building
Leasehold Improvements
Debt Refinancing

15. SBA Conditions Business Cash Flow
Five “C’s”- 20%+ Ownership Requires Personal Guarantee
Eligibility:
Size
Type Of Business
Use Of Proceeds
Availability Of Funds From Other Sources

16. SBA 7(a) Loan Up To $2 Million- SBA Exposure No More Than $1 Million
Interest Rate Negotiated & Pegged To Prime Rate
Guarantee 85% On Loan < $150,000
Guarantee 75% On Loan $150,000 To $1 Million

17. Other SBA Programs 504 Loan Program- Fixed Rate Microloan- 7(m)
Acquire Machinery, Equipment, Real Estate
Expand/Modernize
<$1 Million
Microloan- 7(m)
Short-Term < $35,000
Working Capital, Inventory, Supplies, Furniture, Fixtures, Machinery, Equipment
Not For Existing Debt

18. R & D Limited Partnerships
Tax Sheltered Money For Developing A Technology- No Guarantee
Elements:
Contract
Sponsoring Company- General Partner
Limited Partnership- Limited Liability
Useful When:
High Risk
Significant Expense

19. R & D Contract Features Loss Liability Borne By Limited Partners
Tax Advantages To Limited Partnership & Sponsoring Company
Benefits/Costs
Provides Funds With Minimum Equity Dilution
Expensive To Establish

20. Government (SBIR) Grants
Phase I- Up To $100,000 For 6 Months Feasibility Study
Phase II- Principal R & D Effort, Up to $750,000 For 24 Months, Develop Prototype Products/Services
Phase III- Commercialization, No SBIR Funding

21. R & D Limited Liability Stages
Funding
Contract Established- Terms/Conditions Of Ownership
Money Invested
Development- Research Performed
Exit- Reap Benefits
Equity Partnership
Royalty Partnership
Joint Venture