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Transcript of Chapter 15 Debt Financing Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1...
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 11Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Financing
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 22Chapter 15 Debt FinancingChapter 15 Debt Financing
Debt FinancingDebt Financing
Financing that must be repaid with Financing that must be repaid with interestinterest
SBA: lenders make $600 billion in loans SBA: lenders make $600 billion in loans of less than $1 million to small of less than $1 million to small companies each yearcompanies each year
Total small business borrowing Total small business borrowing approaches $1 approaches $1 trilliontrillion per year per year
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 33Chapter 15 Debt FinancingChapter 15 Debt Financing
Debt FinancingDebt Financing
Is carried as a liability on the company's Is carried as a liability on the company's balance sheetbalance sheet
Can be just as difficult to secure as Can be just as difficult to secure as equity financing, even though sources equity financing, even though sources of debt financing are more numerousof debt financing are more numerous
Can be expensive, especially for small Can be expensive, especially for small companies, because of the risk/return companies, because of the risk/return tradeoff – “prime-plus…”tradeoff – “prime-plus…”
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 44Chapter 15 Debt FinancingChapter 15 Debt Financing
Consider Borrowing Consider Borrowing Money to…Money to… Increase your work force and/or Increase your work force and/or
inventory to boost salesinventory to boost sales Gain market shareGain market share Purchase new equipmentPurchase new equipment Refinance existing debtRefinance existing debt Take advantage of cash discountsTake advantage of cash discounts
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 55Chapter 15 Debt FinancingChapter 15 Debt Financing
Consider Borrowing Consider Borrowing Money to…Money to… Buy the building in which your Buy the building in which your
business is locatedbusiness is located Establish a relationship with a Establish a relationship with a
lenderlender Retire debt held by a “non-Retire debt held by a “non-
relationship” creditorrelationship” creditor Deal with a downturn in businessDeal with a downturn in business
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 66Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital
Commercial banksCommercial banks
85.9%
5.5% 5.1% 3.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Under $100,000 $100,001 to $250,000 $250,000 to $1
million
More than $1 million
Loan Size
Commercial Bank Loans to Small Businessby Loan Size
Source: Source SBA: Banking and SME Financing in the United States, June 2006, http://www.sba.gov/advo/research/rs277tot.pdf.
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 88Chapter 15 Debt FinancingChapter 15 Debt Financing
Commercial Commercial BanksBanks
Lenders of Lenders of firstfirst resort for small resort for small business ownersbusiness owners
SBA study: Banks provide 64.7% of SBA study: Banks provide 64.7% of all traditional debt to small all traditional debt to small businesses businesses
Small banks (<$500 million in Small banks (<$500 million in assets) are most likely to lend money assets) are most likely to lend money to small businessesto small businesses
Focus on a company’s ability to Focus on a company’s ability to generate positive cash flow when generate positive cash flow when evaluating loan proposalsevaluating loan proposals
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 99Chapter 15 Debt FinancingChapter 15 Debt Financing
Commercial Commercial BanksBanks Conservative lendersConservative lenders
Significant owner investmentSignificant owner investment Sufficient cash flow for Sufficient cash flow for
repaymentrepayment Ample collateral as securityAmple collateral as security SBA loan guaranteeSBA loan guarantee Personal guaranteePersonal guarantee
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1010Chapter 15 Debt FinancingChapter 15 Debt Financing
Commercial BanksCommercial Banks
Short-term loans – the Short-term loans – the commercial banks’ commercial banks’ specialtyspecialty Commercial loansCommercial loans Lines of creditLines of credit
...the heart of the financial market for small ...the heart of the financial market for small
businesses!businesses!
How large a line of credit?How large a line of credit?
Example:Example: Average collection period ratioAverage collection period ratio 49 days 49 days + Average inventory turnover ratio+ Average inventory turnover ratio + 53+ 53 days days= Total= Total 102 days 102 days- Average payable period ratio Average payable period ratio - -
3939 days days= Cash flow cycle= Cash flow cycle 63 days63 days
Annual salesAnnual sales $5,800,000 $5,800,000Average daily sales (Annual sales Average daily sales (Annual sales ÷÷ 365 days) 365 days)
$15,890$15,890
Cash Flow cycleCash Flow cycle 63 days63 daysx Average daily salesx Average daily sales x $15,890x $15,890EqualsEquals $1,001,096 $1,001,096- Forecasted profit (Annual sales x net profit margin)- Forecasted profit (Annual sales x net profit margin) - - $377,000$377,000= Line of credit requirement= Line of credit requirement $ $624,096624,096
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1212Chapter 15 Debt FinancingChapter 15 Debt Financing
Commercial BanksCommercial Banks
Short-term loans – the Short-term loans – the commercial banks’ specialtycommercial banks’ specialty Commercial loansCommercial loans Lines of creditLines of credit
...the heart of the financial market for small ...the heart of the financial market for small
businesses!businesses!
Floor planningFloor planning
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1313Chapter 15 Debt FinancingChapter 15 Debt Financing
Intermediate and long-Intermediate and long-term loansterm loans Term loansTerm loans Installment loansInstallment loans Discounted installment Discounted installment
contractscontracts Character loansCharacter loans
Commercial BanksCommercial Banks
...the heart of the financial market for small ...the heart of the financial market for small
businesses!businesses!
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1414Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital Commercial banksCommercial banks Asset-based lendersAsset-based lenders
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1515Chapter 15 Debt FinancingChapter 15 Debt Financing
Asset-Based Asset-Based BorrowingBorrowing
Two common methods:Two common methods: Discounting accounts Discounting accounts
receivablereceivable
AccountsReceivable
Inventory financingInventory financing
Source: Commercial Finance Association
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
Mill
ion
s o
f $
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Asset-Based Loans(in Millions of $)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1717Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital Commercial banksCommercial banks
Trade creditTrade credit Equipment suppliersEquipment suppliers Commercial finance companiesCommercial finance companies Saving and loan associationsSaving and loan associations
Asset-based lendersAsset-based lenders
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1818Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital Stock brokerage housesStock brokerage houses Insurance companiesInsurance companies Credit unionsCredit unions BondsBonds Private placementsPrivate placements Small Business Investment Small Business Investment
Companies (SBICs)Companies (SBICs)
(Continued)(Continued)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 1919Chapter 15 Debt FinancingChapter 15 Debt Financing
Small Business Small Business Investment Companies Investment Companies (SBICs)(SBICs) About 400 SBICs operate in the About 400 SBICs operate in the
U.S.U.S. Use a combination of private Use a combination of private
capital and federally guaranteed capital and federally guaranteed debt to provide long-term capital debt to provide long-term capital to small companiesto small companies
Since 1958, SBICs have provided Since 1958, SBICs have provided more than $48 billion in financing more than $48 billion in financing to 100,000 small companies to 100,000 small companies
Source: SBIC Program Overview, National Association of Small Business Investment Companies, 2007.
SBIC Financing Patterns
Debt20.5%
Debt and Equity28.5%
Equity51.0%
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2121Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital
Stock brokerage housesStock brokerage houses Insurance companiesInsurance companies Credit unionsCredit unions BondsBonds Private placementsPrivate placements Small Business Investment Small Business Investment
Companies (SBICs)Companies (SBICs)
(Continued)(Continued)
Small Business Lending Companies Small Business Lending Companies (SBLCs)(SBLCs)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2222Chapter 15 Debt FinancingChapter 15 Debt Financing
Sources of Debt Sources of Debt CapitalCapital
Economic Development Economic Development Administration (EDA)Administration (EDA)
Department of Housing and Urban Department of Housing and Urban Development (HUD)Development (HUD)
U.S. Department of Agriculture’s U.S. Department of Agriculture’s Rural Business-Cooperative Rural Business-Cooperative ServiceService
Federally Sponsored Programs:Federally Sponsored Programs:
(Continued)(Continued)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2323Chapter 15 Debt FinancingChapter 15 Debt Financing
Small Business Innovation Research Small Business Innovation Research (SBIR) (SBIR)
Small Business Technology Transfer Small Business Technology Transfer programsprograms
Small Business Administration (SBA) Small Business Administration (SBA) – largest single backer of small – largest single backer of small businesses in the nationbusinesses in the nation
Sources of Debt Sources of Debt CapitalCapital
Federally Sponsored Programs:Federally Sponsored Programs:
(Continued)(Continued)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2424Chapter 15 Debt FinancingChapter 15 Debt Financing
Small Business Small Business Administration Loan Administration Loan ProgramsPrograms
SBA has helped 20 million small SBA has helped 20 million small companies acquire the capital they companies acquire the capital they need for start-up and growth need for start-up and growth
SBASBAExpressExpress Program – loan Program – loan guarantees of up to 50% on loans guarantees of up to 50% on loans up to $350,000up to $350,000
7(A) Loan Guaranty Program – the 7(A) Loan Guaranty Program – the most popular SBA loan programmost popular SBA loan program
Source: U.S. Small Business Administration
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
Bill
ion
s o
f $
1976 1980 1984 1988 1992 1996 2000 2004
SBA 7(A) Guaranteed Loans
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2626Chapter 15 Debt FinancingChapter 15 Debt Financing
SBASBAExpressExpress Program Program 7(A) Loan Guaranty Program7(A) Loan Guaranty Program CAPLine ProgramCAPLine Program International Trade ProgramsInternational Trade Programs
Export Working Capital ProgramExport Working Capital Program International Trade ProgramInternational Trade Program
Small Business Small Business Administration Loan Administration Loan ProgramsPrograms
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2727Chapter 15 Debt FinancingChapter 15 Debt Financing
Section 504 Certified Section 504 Certified Development Company ProgramDevelopment Company Program
Microloan ProgramMicroloan Program Average loan is $13,000 with a Average loan is $13,000 with a
maturity of 3 years (Maximum is 6 maturity of 3 years (Maximum is 6 years) years)
37% go to business start-ups 37% go to business start-ups
Small Business Small Business Administration Loan Administration Loan ProgramsPrograms
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2828Chapter 15 Debt FinancingChapter 15 Debt Financing
Prequalification Loan ProgramPrequalification Loan Program Disaster LoansDisaster Loans 8(A) Loan Program8(A) Loan Program
Small Business Small Business Administration Loan Administration Loan ProgramsPrograms
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 2929Chapter 15 Debt FinancingChapter 15 Debt Financing
State and Local Loan State and Local Loan ProgramsPrograms
Capital Access Programs (CAPs) – Capital Access Programs (CAPs) – now offered in 22 states and are now offered in 22 states and are designed to encourage lenders to designed to encourage lenders to make loans to businesses that do make loans to businesses that do not qualify for traditional financing not qualify for traditional financing
Revolving Loan Fund (RLFs) – Revolving Loan Fund (RLFs) – combine private and public funds combine private and public funds to make small business loans to make small business loans
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 3030Chapter 15 Debt FinancingChapter 15 Debt Financing
Internal Methods of Internal Methods of FinancingFinancing Factoring - selling accounts Factoring - selling accounts
receivable outrightreceivable outright
Source: "Annual Asset-Based Lending and Factoring Surveys 2006," Commercial Finance Association, July 2, 2007, p. 15.
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Mill
ion
s o
f $
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Factoring Volume(in Millions of $)
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 3232Chapter 15 Debt FinancingChapter 15 Debt Financing
Factoring - selling accounts Factoring - selling accounts receivable outrightreceivable outright
Leasing assets rather than Leasing assets rather than buying thembuying them
Credit cardsCredit cards
Internal Methods of Internal Methods of FinancingFinancing
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 3333Chapter 15 Debt FinancingChapter 15 Debt Financing
Web SitesWeb Sites
American Bankers AssociationAmerican Bankers Associationhttp://www.aba.com/default.htmhttp://www.aba.com/default.htm
National Association of Small National Association of Small Business Investment CompaniesBusiness Investment Companieshttp://www.nasbic.com/http://www.nasbic.com/
U.S. Small Business U.S. Small Business AdministrationAdministrationhttp://www.sba.gov/http://www.sba.gov/
Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 3434Chapter 15 Debt FinancingChapter 15 Debt Financing
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Copyright ©2009 Pearson Education, Copyright ©2009 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall