6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of...
Transcript of 6-1 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of...
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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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
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
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
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
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
6-7McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Small Business Share Of StockSmall Business Share Of Stock
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
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
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
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
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
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
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
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
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
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
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
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
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
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
6-22McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Sources Of LoansSources Of Loans
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
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
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
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?