1. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 17-1

2. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 17-2 Chapter 17

3. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Debt financing: temporary supply of funding with a contractual obligation to repay with interest  Organic funding: funding a growing business by its own cash flow 17-3

4. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  SBA: lenders make $600 billion in loans of less than $1 million to small companies each year  Total small business borrowing approaches $1 trillion per year  NFIB survey: only 7% of small business owners say their credit needs are not being met 17-4

5. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 17-5 Value of Small Business Loans

6. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Debt is carried as a liability on the company's balance sheet  Can be expensive, especially for small companies, because of the risk/return tradeoff  Prime rate 17-6

7. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Reasons for borrowing:  Increasing the company’s workforce and/or inventory to boost sales  Gaining market share  Purchasing new equipment  Refinancing existing debt  Taking advantage of cash discounts  Buying the building in which the business is located  Establishing a relationship with a lender  Foreseeing a downturn in business 17-7

8. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 17-8 Small Business Financing Strategies

9. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Commercial Banks  Lenders of first resort for small business owners  Provide 50% of the dollar value of loans to small businesses  Focus on a company’s ability to generate positive cash flow when evaluating loan proposals  Company’s track record  Small banks are most likely to lend money to small businesses 17-9

10. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Types of short term loans:  Commercial loans or traditional bank loans  Line of credit:  Short-term loan with a preset limit that provides much-needed cash flow for day-to-day operations  Floor planning  Used for “big ticket” items 17-10

11. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Intermediate- and Long-Term Loans  Term loans  Impose restrictions (called covenants) on the business decisions an entrepreneur makes concerning the company’s operations  Installment loans  Used for purchasing equipment, facilities, real estate, and other fixed assets 17-11

12. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Asset-Based Lenders  Asset-based lenders: usually smaller commercial banks, commercial finance companies, or specialty lenders, that allow small businesses to borrow money by pledging otherwise idle assets, such as accounts receivable, inventory, or purchase orders, as collateral 17-12

13. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The most common methods of asset-based financing:  Discounting accounts receivable  Inventory financing  Purchase order loans 17-13

14. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Trade Credit  Trade credit involves convincing vendors and suppliers to sell goods and services without requiring payment up front  60% of small businesses use trade credit as a source of financing  The key to maintaining trade credit as a source of funds is establishing a consistent and reliable payment history 17-14

15. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Equipment Suppliers  Encourage buyers by offering financing over time  Commercial Finance Companies  Tolerate more risk  Offer faster turnaround times, longer repayments schedules, and more flexible payment plans than traditional lenders 17-15

16. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Stock brokerage houses  Margin loans  Margin call  Insurance companies  Policy loans  Mortgage loans 17-16

17. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Credit unions: nonprofit financial cooperatives that promote saving and provide loans to their members, are best known for making consumer and car loans  Make $12 billion in small business loans to their members each year 17-17

18. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Bonds  Because of the costs involved, issuing bonds usually is best suited for companies generating annual sales between $5 million and $30 million and having capital requirements between $1.5 million and $10 million  Convertible bonds  Industrial development bonds 17-18

19. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Private placements  Involves selling debt to one or a small number of investors, usually insurance companies or pension funds  A hybrid between a conventional loan and a bond 17-19

20. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Private placements offer several advantages:  They usually carry fixed interest rates rather than the variable rates banks often charge  The maturity is longer than most bank loans: 15 years rather than five  They do not require hiring expensive investment bankers  Because private investors can afford to take greater risks than banks, they are willing to finance deals for fledgling small companies 17-20

21. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Small Business Investment Companies (SBICs)  SBICs: privately owned financial institutions that are licensed and regulated by the SBA  More than 300 SBICs operate in the U.S.  Use a combination of private capital and federally guaranteed debt to provide long-term capital to small companies  In 2012, SBICs provided $3.1 billion in financing to more than 1,000 small businesses, which was a 17 percent increase from 2011 and an 83 percent increase from 2010 17-21

22. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Economic Development Administration  Department of Housing and Urban Development (HUD)  U.S. Department of Agriculture’s Rural Business- Cooperative Program and Business Program  Small Business Innovation Research Program (SBIR)  Small Business Technology Transfer Program  Small Business Innovation Research (SBIR) 17-22

23. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Small Business Administration (SBA)  The largest single backer of small businesses in the nation  The SBA does not actually lend money to entrepreneurs directly; instead, entrepreneurs borrow money from a traditional lender and the SBA guarantees a percentage of the loan to the lender in case the borrower defaults  In 2012, the SBA guaranteed more than $30 billion in lending to more than 47,000 small businesses 17-23

24. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  SBA lending programs  SBAExpress Program  Patriot Express loan program  Small Loan Advantage Program  Community Advantage  7(A) Loan Guaranty Program 17-24

25. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 17-25 SBA 7 (A) Guaranteed Loans

26. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  SBA lending programs  SBAExpress Program  Patriot Express loan program  Small Loan Advantage Program  Community Advantage  7(A) Loan Guaranty Program  The Capline Program  Section 504 Certified Development Company Program  Certified development company 17-26

27. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  SBA lending programs (continued)  Microloan Program  Microloans  Loans Involving International Trade  Export Express Program  Export Working Capital Program  The International Loan Program  Disaster Assistance Loans  Disaster assistance loans 17-27

28. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Capital Access Programs (CAPs)  Offered in 22 states  Designed to encourage lenders to make loans to businesses that do not qualify for traditional financing  Revolving Loan Fund (RLFs)  Combine private and public funds to make loans  Community Development Financial Institutions (CDFIs)  Designate at least some of their loan portfolios for entrepreneurs and small businesses 17-28

29. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Factoring Accounts Receivable  Factoring: selling accounts receivable outright  Leasing  Cash advances  Peer-to-peer loans  Credit cards 17-29

30. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Beware of con artists and other scams!  “If it sounds too good to be true, it probably is” 17-30

31. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Be suspicious of anyone who approaches you— unsolicited—with an offer for “guaranteed financing”  Watch out for red flags that indicate a scam: “guaranteed” loans, up-front fees, and unsolicited pitches over the Web  Conduct a thorough background check on any lenders, brokers, or financiers with whom you intend to do business 17-31

32. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Make sure you have an attorney review all loan agreements before you sign them  Never pay advance fees for financing, especially on the Web, unless you have verified the lender’s credibility 17-32

33. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 17-33