6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of...

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6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Importance Of Proper Financing Financing Estimating Needs Estimating Needs Debt Vs. Equity Structure Debt Vs. Equity Structure Types/Sources Of Equity Types/Sources Of Equity & Debt & Debt What Lender Looks For What Lender Looks For Chapter 6

Transcript of 6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of...

Page 1: 6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of Proper Financing Estimating Needs Estimating Needs.

6-1

How To Obtain The Right Financing For Your Business

Importance Of Proper FinancingImportance Of Proper FinancingEstimating NeedsEstimating NeedsDebt Vs. Equity StructureDebt Vs. Equity StructureTypes/Sources Of Equity Types/Sources Of Equity & Debt& DebtWhat Lender Looks ForWhat Lender Looks For

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Page 2: 6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of Proper Financing Estimating Needs Estimating Needs.

6-2McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Capital RequirementsCapital RequirementsA

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WA SHINGTON, D.C.

TH IS N O TE IS LE GA L TE N DE R

FOR A LL D E B TS , P UB LIC AN D P RIV A TE

S E RIES

19 85

H 293 Fixed AssetsFixed AssetsA

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WA SHINGTON, D.C.

TH IS N O TE IS LE GA L TE N DE R

FOR A LL D E B TS , P UB LIC AN D P RIV A TE

S E RIES

19 85

H 293 Working CapitalWorking Capital

Current AssetsCurrent Assets

-Current LiabilitiesCurrent Liabilities

Working CapitalWorking CapitalPhotoLink/Getty Images

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6-3McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types Of FinancingTypes Of Financing

Debt- Lender’s Income Does Debt- Lender’s Income Does NotNot Vary With Business Vary With Business SuccessSuccess

Equity- Stockholder’s Equity- Stockholder’s Income Income DoesDoes Vary With Vary With Business SuccessBusiness Success

PhotoLink/Getty Images

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6-4McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Cash BudgetsCash Budgets$

$

$

$$ Project Working Capital NeedsProject Working Capital Needs$

$

$

$$ Reflects Reflects WhenWhen$

$

$

$$ Revenue CollectedRevenue Collected$

$

$

$$ Expenses PaidExpenses Paid$

$

$

$$ Considers Seasonal Revenue Considers Seasonal Revenue FluctuationsFluctuations

$

$

$

$$ Used For Obtaining Working Used For Obtaining Working Capital (Line Of Credit) LoansCapital (Line Of Credit) Loans

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6-5McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Equity FinancingEquity FinancingOwner’s Share Of Firm’s AssetsOwner’s Share Of Firm’s AssetsProprietorship/Partnership Equals Proprietorship/Partnership Equals

Owner’s Personal AssetsOwner’s Personal AssetsCorporation = Stock, Corporation = Stock,

1 Share = 1 Vote1 Share = 1 VoteCommonCommonPreferredPreferred

Investment Liquidity Depends On Investment Liquidity Depends On MarketMarket

PhotoLink/Getty Images

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6-6McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Common StockholdersCommon Stockholders

Real Owners Of CorporationReal Owners Of Corporation

Financial Claim Is Financial Claim Is AfterAfter

All OthersAll Others

Right To VoteRight To Vote

Control ManagementControl ManagementRoyalty-Free/CORBIS

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6-7McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Small Business Share Of StockSmall Business Share Of Stock

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6-8McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Preferred StockholdersPreferred StockholdersClaim To ProfitsClaim To ProfitsBeforeBefore Common Stock Common Stock DividendsDividends

Not Legally EnforceableNot Legally EnforceableNo Voting RightsNo Voting RightsFixed Par Value & DividendFixed Par Value & DividendCumulative DividendCumulative Dividend

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6-9McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Small CompanySmall CompanyOffering Registration (SCOR)Offering Registration (SCOR)

Raise Up To $1 Million Raise Up To $1 Million

TradedTradedAMEXAMEXOTCOTC

Ryan McVay/Getty Images

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6-10McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Sources ofSources ofEquity FinancingEquity Financing

SelfSelfSmall Business Investment Companies Small Business Investment Companies

(SBICs)(SBICs)Venture CapitalistsVenture CapitalistsAngel CapitalistsAngel CapitalistsRetained EarningsRetained EarningsOtherOther

Business IncubatorsBusiness IncubatorsEmployee Stock Ownership Plans (ESOPs)Employee Stock Ownership Plans (ESOPs)CustomersCustomers

PhotoLink/Getty Images

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6-11McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Steps ToSteps ToImprove Investor RelationsImprove Investor Relations

Range Of Funds NeededRange Of Funds NeededIdentify Investor Identify Investor Skills/AbilitiesSkills/Abilities

Find Investor With Similar Find Investor With Similar InterestsInterests

Avoid “Quick Buck” InvestorAvoid “Quick Buck” InvestorFind Investor With More Assets Find Investor With More Assets Than Just MoneyThan Just Money

PhotoLink/Getty Images

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6-12McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

What Investor Wants To KnowWhat Investor Wants To Know

Can Investor Work With Can Investor Work With Owner?Owner?

Is Owner Flexible?Is Owner Flexible?Is Owner Committed?Is Owner Committed?Criticism, Feedback, Criticism, Feedback, Assistance?Assistance?

Definite, Fixed, Realistic Definite, Fixed, Realistic Goals?Goals?

Photomondo/Getty Images

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6-13McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

BarteringBarteringCompanies Swapping Items Of Companies Swapping Items Of Equal ValueEqual ValueUsesUses

Business TravelBusiness TravelDebt CollectionDebt CollectionClosing A SaleClosing A SaleEmployee Perks/BonusesEmployee Perks/BonusesLine Of CreditLine Of Credit

Subject To TaxSubject To Tax

Artville/Getty Images

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6-14McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Accounting For Bartering Accounting For Bartering

Items Dissimilar- Items Dissimilar- Gain Vs. LossGain Vs. Loss

Items Alike- Use Book Items Alike- Use Book Value Of Old ItemValue Of Old Item

Janis Christie/Getty Images

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6-15McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Debt FinancingDebt FinancingComes From LendersComes From LendersMust Be RepaidMust Be RepaidAt Specified Interest RateAt Specified Interest Rate

Within Agreed-Upon Time SpanWithin Agreed-Upon Time Span

Legal Claim On Assets Before Legal Claim On Assets Before StockholdersStockholders

Equity = Safety Net For LendersEquity = Safety Net For Lenders

Ryan McVay/Getty Images

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6-16McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Debt Financing Advantages Debt Financing Advantages

1)1) Cost Of Debt Lower Than EquityCost Of Debt Lower Than Equity2)2) Interest Payments DeductibleInterest Payments Deductible3)3) Debt Funding Allows For Debt Funding Allows For

More Capital To Be More Capital To Be Raised In Addition Raised In Addition To EquityTo Equity

4)4) Since Debt Payment Is Since Debt Payment Is Fixed It Allows Owner To Fixed It Allows Owner To Keep Remaining ProfitsKeep Remaining Profits

5)5) LeverageLeverageRoyalty-Free/CORBIS

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6-17McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types Of LoansTypes Of LoansMortgage- Secured By Real EstateMortgage- Secured By Real Estate

Chattel Mortgage- Collateral Other Chattel Mortgage- Collateral Other Than Land, e.g., Machinery, Than Land, e.g., Machinery, Vehicles, InventoryVehicles, Inventory

Asset-Based- Secured By Asset-Based- Secured By AR & InventoryAR & Inventory

Unsecured- Personal GuaranteesUnsecured- Personal GuaranteesRoyalty-Free/CORBIS

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6-18McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Sources Of Debt FinancingSources Of Debt Financing

Trade Credit- ConsignmentTrade Credit- Consignment

Commercial/Other Commercial/Other

Financial Institutions- Financial Institutions-

Line Of CreditLine Of Credit

Credit CardsCredit Cards

Insurance CompaniesInsurance CompaniesRyan McVay/Getty Images

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6-19McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Suppliers OfSuppliers OfSmall Firm Credit (1998)Small Firm Credit (1998)

0% 10% 20% 30% 40% 50%

Commercial Banks

Leasing

Family & Friends

Government

Owner

Personal Credit Cards

Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

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6-20McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Traditional Sources OfTraditional Sources OfSmall Firm Credit (1998)Small Firm Credit (1998)

13%

27%18%

11%

10% 21%

Line Of Credit

Mortgage

Vehicle

Equipment

Lease

Other

Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

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6-21McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Non-Traditional Sources OfNon-Traditional Sources OfSmall Firm Credit (1998)Small Firm Credit (1998)

46%

14%6%

34%

Owner Loan

Personal CreditCard

Business CreditCard

Unknown

Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

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6-22McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Sources Of LoansSources Of Loans

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6-23McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Leasing = Debt FinancingLeasing = Debt Financing

Use Of Someone Else’s PropertyUse Of Someone Else’s Property

Specified Time PeriodSpecified Time Period

BenefitsBenefitsEntire Payment Deductible Entire Payment Deductible

Not Just Interest PortionNot Just Interest Portion

Lease Equipment For Which Loan Lease Equipment For Which Loan Financing Not AvailableFinancing Not Available

Steve Cole/Getty Images

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6-24McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Small Business Small Business AdministrationAdministration

Guaranteed Loans- 7(a) = 30 to Guaranteed Loans- 7(a) = 30 to 40% Of Long-Term Loans40% Of Long-Term Loans

Purchase Land, Buildings, EquipmentPurchase Land, Buildings, EquipmentWorking CapitalWorking CapitalRefinance Existing DebtRefinance Existing DebtSeasonal Lines Of CreditSeasonal Lines Of Credit

Specialized ProgramsSpecialized ProgramsSBICsSBICsU.S. Department Of AgricultureU.S. Department Of Agriculture

Ryan McVay/Getty Images

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6-25McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

SBA Required DocumentsSBA Required Documents

Narrative Business PlanNarrative Business PlanResumesResumesLoan RequestLoan Request

How To Be UsedHow To Be UsedList Of AssetsList Of Assets

Financial Statement- 3 YearsFinancial Statement- 3 YearsFirm’sFirm’sPersonalPersonal

CollateralCollateral

Royalty-Free/CORBIS

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6-26McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Lenders Want To KnowLenders Want To KnowStartupStartupCan You Live Without Income Can You Live Without Income

From Business?From Business?Loan Repayment?Loan Repayment?Collateral?Collateral?

ExistingExistingTrack RecordTrack RecordFuture Difference?Future Difference?