1. Entrepreneurship Chapter 10 Financing Strategy: Debt, Equity, or Both?

2. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 2 Financing W ays to obtain capital for a business: 1.Obtain gifts & grants 2.Borrow money (debt) 3.Exchange a share of the business for money (equity)

3. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 3 Ways to Secure Growth Funding Finance with earnings Finance with equity Finance with debt

4. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 4 How Often Do Small Businesses Fail? Myth: 4 out of 5 small businesses fail in the first 5 years of operation. Truth: over half of new small firms survive for 8 or more years (according to Dun & Bradstreet study). A small business is a high risk-high return investment.

5. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 5 Gifts & Grants Don’t stake your business on these Gifts Cash, free facilities & equipment, unpaid labor from friends & family, & forgiveness of debts Tax abatements & tax credits Grants Primarily for research & commercialization Difficult to get for low-tech, start-ups Gifts & grants do not require repayment

6. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 6 How Can You Compensate Investors in Your Business? 1.Debt—Borrow money & promise to pay it back over a set period of time at a set rate of interest. Investor receives interest. 2. Equity—Sell a percentage (share) of ownership in your business for money. Investor receives share of profits.

7. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 7 Debt Financing Available in many forms Commercial loans Personal loans Leases Bonds

8. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 8 Debt Financing: Pros and Cons Pros: Lender has no say in operation of business. Loan payments are predictable. Lenders do not share business profits. Cons: If loan payments are not made, lender can force business into bankruptcy. If business is not incorporated & defaults, lender can take house & other possessions of owner. Loan payments increase fixed costs, lower profit.

9. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 9 Equity Financing: Pros and Cons Pros: If business does not make profit, investor does not get paid. Equity investors want business to succeed, will share contacts & advice. Cons: Entrepreneur can lose control of business to equity investors. Equity investor takes more risk, wants higher return. Entrepreneur must share profits with equity investors.

10. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 10 The 5 “Cs” of Credit 1.Collateral 2.Character 3.Capacity 4.Capital 5.Conditions

11. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 11 Community Development Financial Institutions (CDFIs) Community Development Banks Community Development Credit Unions Community Development Loan Funds Community Development Venture Capital Funds

12. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 12 Other Non-Bank Sources Friends & family Venture capitalists Angels Insurance companies Vendors Federally supported investment companies (SBICS, MESBICS, New Market Venture Companies) Rural programs Youth financing Bootstrap financing

13. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 13 Creative Financing Options Microenterprise Loans: Up to $35,000, often supported by federal government or not-for-profit agencies Loan made based on alternative credit criteria & may require training, counseling, &/or a business plan May be the only option for debt financing outside of family & friends & personal credit cards for many entrepreneurs Often a social impact goal involved for the lender

14. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 14 More Creative Financing Angel Financing: Private investors seeking equity Typically $100,000–$500,000 range Bootstrap Financing: Hire as few employees as possible Lease rather than buy equipment Use personal savings Work from home, borrow office space (business incubators) Put profits back into business

15. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 15 Three Categories of Financial Investment 1.Stocks—shares of companies (equity) 2.Bonds—loans to companies or government entities (debt) 3.Cash—investments that can be liquidated (turned into cash) within 24 hours (savings accounts, treasury bills) The higher the reward an investment offers, the greater the risk.

16. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 16 Stocks Shares of stock represent a percentage ownership in a corporation. Public corporations sell stock to the general public to raise capital. Prices of stocks reflect investors’ opinions about business performance & value. Traded on stock exchanges

17. Entrepreneurship, 2 nd Edition Mariotti and Glackin and NFTE © 2010 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 17 Bonds Interest bearing certificates that corporations & governments issue to raise capital Lower risk & return expected than with stocks A form of debt financing with a guaranteed rate of return to investors Trade at premiums or discounts