1. Chapter 11 Sources of Capital McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives To identify the types of financing available
To understand the role of commercial banks in financing new ventures, the types of loans available, and bank lending decisions
To discuss Small Business Administration (SBA) loans
To understand the aspects of research and development limited partnerships

3. Learning Objectives
To discuss government grants, particularly Small Business Innovation Research grants
To understand the role of private placement as a source of funds

4. Debt or Equity Financing
Debt financing: Obtaining borrowed funds for the company
Requires asset to be used as collateral
Equity financing: Obtaining funds for the company in exchange for ownership
Does not require collateral
Offers investor some form of ownership position

5. Internal or External Funds
Internal funds- Generated from sources within the company
Profits
Sale of assets
Working capital reduction
Accounts receivable
Short-term internal source of funds:
Reducing short-term assets
Extended payment terms from suppliers.

6. Personal Funds Least expensive in terms of cost and control
Essential for attracting outside funding
Sources include:
Savings
Life insurance
Mortgage on a house or car

7. Family and Friends
Likely to invest due to relationship with entrepreneur
Advantage - Easy to obtain money
Disadvantage - Direct input into operations of a venture

8. Family and Friends A formal agreement must include:
Amount of money involved
Terms of the money
Rights and responsibilities of the investor
Steps to be taken when a business fails

9. Commercial Banks Asset base for loan
Tangible collateral valued at more than the amount of money borrowed
Types of bank loans
Accounts receivable
Inventory
Equipment
Real-estate

10. Commercial Banks
Conventional bank loans: Standard way banks lend money to companies
Types of loans
Installment
Straight commercial
Long-term
Character

11. Commercial Banks Bank lending decisions - Based on:
Quantifiable information and subjective judgments
Five Cs of lending - Character, Capacity, Capital, Collateral, and Conditions
Review of past financial statements and future projections
Ability to repay the loan

12. Role of the SBA in Small-Business Financing
Small Business Administration (SBA)
Guarantor of loans made by private and other institutions
Proceeds can be used for:
Working capital
Machinery and equipment
Furniture and fixtures
Land and building
Leasehold improvements
Debt refinancing

13. Role of the SBA in Small-Business Financing
Eligibility criteria
Repayment ability
Five “C’s”
Size
Type of business
Use of proceeds
Availability of funds from other sources

14. Role of the SBA in Small-Business Financing
Interest rates are:
Negotiated
Subject to SBA maximums
May be fixed or variable

15. Role of the SBA in Small-Business Financing
504 loan program - Provides fixed-rate financing
To acquire machinery, equipment, or even real estate
For maximum value of $1 million
SBA Microloan – 7(m) loan program
Short-term loans of up to $35,000
Working capital, purchase of inventory, supplies, furniture, fixtures, machinery, or equipment
Cannot be used to pay existing debts

16. Private Placement Private offerings
Formalized method for obtaining funds from private investors
Faster and less costly

17. Private Placement Regulation D: Laws governing a private offering
Contains broad provisions designed to simplify private offerings
General definitions of what constitutes a private offering
Provides specific operating rules—Rule 504,505, and 506

18. Bootstrap Financing Disadvantages of using outside capital
Takes between three and six months to raise
Decreases a firm’s drive for sales and profits
Increases the impulse to spend
Decreases the company’s flexibility
May cause disruption and problems in the venture

19. Bootstrap Financing
Involves using any possible method for conserving cash, such as:
Use of discounts for volume
Frequent customer discounts
Promotional discounts
Obsolescence money
Savings through bulk packaging
Consignment financing