1. Financing Your Business Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up Obtaining Financing and Growth Capital 19.1 Section 19.2 Section 19

2. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Describe the resources available to entrepreneurs to start a business. Compare and contrast sources of financing for start-up ventures. Describe the importance of financial planning. Section Objectives

3. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Most start-up funds come from an entrepreneur’s personal resources, such as savings; however, there are other common sources of funding. The Main Idea

4. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Content Vocabulary bootstrapping factor equity capital equity risk capital angel venture capital venture capitalist debt capital operating capital line of credit trade credit

5. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business One of the unique talents of entrepreneurs is finding the resources to launch a business. This requires understanding the differences between: short-term needs, those associated with activities not part of normal operations; and long-term capital needs, relating to preparation for future growth. Entrepreneurial Resources

6. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Most entrepreneurs get their businesses started by bootstrapping. bootstrapping operating a business as frugally as possible and cutting all unnecessary expenses, accomplished by borrowing, leasing, and partnering to acquire resources Bootstrapping

7. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Bootstrapping involves: hiring as few employees as possible leasing anything you can being creative Bootstrapping

8. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Bootstrapping entrepreneurs can also ask suppliers to allow for longer payments terms, ask customers to pay in advance, or sell their accounts receivable to a factor. factor an agent who handles an entrepreneur’s accounts receivable for a fee Bootstrapping

9. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business The main sources for start-up money for entrepreneurs include: friends family others who believe in the entrepreneur Start-Up Money These resources come in several forms, such as savings, credit cards, loans, and investments.

10. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Some sources of financing include: banks finance companies investment companies government grants Financing the Start-Up

11. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business To obtain equity capital as a source of funding for a business, the owner must give equity to obtain the financing. equity capital cash raised for a business in exchange for an ownership stake in the business Sources of Equity Financing equity an ownership in a business

12. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Equity funding is sometimes called risk capital. risk capital money invested in companies where there is financial risk Sources of Equity Financing

13. 13 Forms of Equity Financing Personal savings Friends and family Private investors Partners Venture capitalists State- sponsored venture capital funds

14. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business An angel often invests because of his or her belief in a business concept and the founding team. angel a private, nonprofessional investor, such as a friend, a relative, or a business associate, who funds start-up companies Sources of Equity Financing

15. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business An existing business can use venture capital financing to raise large amounts of money to achieve its goals. venture capital a source of equity financing for small businesses with exceptional growth potential and experienced senior management Sources of Equity Financing

16. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Venture capitalists often provide managerial and technical expertise to small businesses. venture capitalists individual investors or investment firms that invest venture capital professionally Sources of Equity Financing

17. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Sources of debt capital are far more numerous than sources of equity capital, but the entrepreneur must be certain the business can generate enough cash flow to repay the loan. debt capital money raised by taking out loans, which must be repaid with interest Sources of Debt Financing

18. 18 Sources of Debt Financing Banks Trade credit Minority enterprise development programs Commercial finance companies SBA loans Small business investment companies

19. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Banks were once the primary source of operating capital, but today they are much more conservative in their lending practices. operating capital money a business uses to support its operations in the short term Sources of Debt Financing

20. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business An established business can usually get a line of credit from a bank, which it can borrow against. line of credit an arrangement whereby a lender agrees to lend up to a specific amount of money at a certain interest rate for a specific period of time Sources of Debt Financing

21. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Some businesses may seek trade credit from other companies in their industry as a form of debt financing. trade credit credit one business grants to another business for the purchase of goods or services; a source of short-term financing provided by one business within another business’s industry or trade Sources of Debt Financing

22. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Financial planning involves finding the right kind of financial resources at the right time in the right amount. Financial Planning for Your Business

23. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business Financial planning involves: Identifying the stages of growth in your business Identifying milestones that require resources Identifying business advisers Hiring an excellent management team Financial Planning for Your Business

24. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business After You Read 1.Describe the resources available to entrepreneurs to start their business. Most entrepreneurs start their businesses by bootstrapping or using personal resources such as friends, family, savings, credit cards, loans, and investments.

25. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business After You Read 2.Compare and contrast sources of financing for start-up ventures. Entrepreneurs have two options: equity or debt financing. Equity sources trade cash for some portion of ownership, or equity, in a business. With debt financing, an entrepreneur borrows money and repays it with interest, and retains full ownership of the business. However, the loan must be carried as a liability on the business’s balance sheet. For this approach to be successful, your business must generate enough cash flow to repay the loan.

26. Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up SECTION SECTION 19.1 Chapter 19 Financing Your Business After You Read 3.Describe the importance of financial planning. Financial planning provides you with a better chance of securing the money you need when you need it in the right amount.

27. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Describe the information needed to obtain financing. Explain the types of growth financing available to entrepreneurs. Describe how to calculate start-up capital requirements. Section Objectives

28. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Additional sources of funding become available when entrepreneurs are ready to grow their businesses. Entrepreneurs must calculate business milestones and financial needs so they can communicate this information to potential funders. The Main Idea

29. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Content Vocabulary pro forma character capacity capital collateral conditions due diligence private placement initial public offering (IPO) stock working capital contingency fund

30. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 To obtain financing, you must create pro forma financial statements to include in your business plan. pro forma proposed or estimated financial statements based on predictions of how the actual operations of the business will turn out How to Obtain Financing

31. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Venture capitalists rarely invest in start-up companies, but when they do, they expect: A tenfold return on their investment in five to seven years (for start-up companies) A five- to seven-times return on their investment (for businesses in the growth stage) A business with large market potential, growing at least 20% each year What Venture Capitalists Expect

32. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Private investors, or angels, expect: businesses they understand investing with like-minded investors ten times their investment at the end of five years a strong management team What Private Investors Expect

33. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Commercial lenders like banks rely on the five Cs to determine the acceptability of a business loan applicant: C C C C C Character Capacity Capitol Collateral Conditions What Bankers Expect

34. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 A bank must believe in the character of the entrepreneur. character a borrower’s reputation for fair and ethical practices, including business experience, dealings with other businesses, and reputation in the community What Bankers Expect

35. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Banks consider the capacity of a business to pay its debts. capacity the ability of a business to pay a loan in view of its income and obligations What Bankers Expect

36. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Banks place a strong emphasis on whether a business has a financially stable capital structure. capital the net worth of a business, the amount by which its assets exceed its liabilities What Bankers Expect

37. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Banks are more likely to lend to businesses with valuable collateral. collateral security in the form of assets that a company pledges to a lender What Bankers Expect

38. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Banks consider all the conditions in which the business operates. conditions the circumstances at the time of the loan request, including potential for growth, amount of competition, location, form of ownership, and insurance What Bankers Expect

39. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 If your company has established a successful track record, there are other types of financing available, including: venture capital (VC) companies private placements initial public offerings (IPOs) Types of Growth Financing

40. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 If a VC firm is interested in funding your business and decides you have a sound business plan, it will begin due diligence. due diligence the investigation and analysis a prudent investor does before making business decisions Venture Capital (VC) Companies

41. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Private placement is a way to raise capital by selling ownership interests in your private corporation or partnership. private placement private offering or sale of securities directly to a limited number of institutional investors who meet certain suitability standards; ownership interests are called securities Private Placement

42. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 An initial public offering (IPO) is a popular way to raise a lot of money for growth since all proceeds go to the company. initial public offering (IPO) the sale of stock in a company on a public stock exchange Initial Public Offering (IPO)

43. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 The CEO of a company that has made an IPO is primarily responsible to the people who own the company stock. stock a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings Initial Pubic Offering (IPO)

44. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 There are five steps to become a public company with stock for sale on a public exchange. 1.Choose an underwriter or investment banker. 2.Draw up a letter of intent. 3.File a registration statement with the SEC. 4.Announce the offering in the financial press. 5.Do a road show. Initial Public Offerings (IPOs)

45. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 You will need to calculate exactly how much money you will need to start or grow your business. This requires estimating start-up costs, which include capital expenditures, working capital (operating costs), and contingency funds. Calculating Your Start-Up Capital Needs

46. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Start-up costs are those costs you incur before you start a business. Start-Up Costs

47. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Start-up costs may include: furniture, fixtures, and equipment promotion expenses and office supplies fees and licenses Start-Up Costs

48. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Operating costs, often referred to as working capital, cover the time between selling your product or service and receiving payment from the customer. working capital the amount of cash needed to carry out the daily operations of a business; it ensures a positive cash flow after covering all operating expenses Operating Costs

49. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 Since no one can predict the future, you should include a contingency fund in your start-up calculations. contingency fund an extra amount of money that is saved and used only when absolutely necessary, such as for unforeseen business expenses Contingency Funds

50. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 After You Read 1.Describe the information needed to obtain financing. After identifying potential sources of investors, you need to prepare estimated financial statements based on predictions of how the actual operations of a business will turn out. Your financial plan must include income statements, cash flow statements, and balance sheets.

51. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 After You Read 2.Explain the types of growth financing available to entrepreneurs. Venture capital (VC) companies are unlikely sources but may be an option to companies with a proven concept and a huge growth potential. Private placement is a way to raise capital by selling ownership interests in a private corporation or partnership. Initial public offerings (IPOs) are sales of stock in a company on a public stock exchange.

52. Obtaining Financing and Growth Capital Glencoe Entrepreneurship: Building a Business SECTION Chapter 19 Financing Your Business 19.2 After You Read 3.Describe how to calculate start-up capital requirements. Entrepreneurs can figure start-up costs by talking to suppliers, vendors, manufacturers, distributors, and others in their industry. Entrepreneurs need to figure capital expenditures, which are costs to purchase equipment and facilities. Next, entrepreneurs need to calculate working capital, how much cash is needed to carry out daily operations. Finally, they must figure contingency funds, extra money used for unforeseen business expenses.

53. Financing Your Business Glencoe Entrepreneurship: Building a Business Financing the Small Business Start-Up Obtaining Financing and Growth Capital 19.1 Section 19.2 Section 19 End of Chapter 19 Financing Your Business