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Transcript of FINANCING YOUR BUSINESS Business Management. Today’s Lesson We will explore differences among...
FINANCING YOUR BUSINESS
Business Management
Today’s Lesson
We will explore differences among various sources of capital.
What are the two methods for obtaining capital?
How is debt capital categorized?
What should a business owner take into consideration when obtaining capital?
What sources of capital are available for businesses?
OBJECTIVE ESSENTIAL QUESTIONS
What are the two methods for obtaining capital?
1. Equity Capital2. Debt Capital
Methods of Obtaining Capital
What are the two methods for obtaining capital?
Owner Capital
The owner(s) personal contributions to the business May come from
personal savings or personal loans
Small businesses rely heavily on owner capital
a.k.a. equity capital
What are the two methods for obtaining capital?
Retained Earnings
Also a type of equity capital because business profits belong to the owner(s)
Business profits saved for use by the business in the future
What are the two methods for obtaining capital?
Debt Capital
Money that others loan to a business
Also known as creditor capital
Banks & other lenders usually will NOT lend to a business unless the equity capital exceeds the debt capital
Remember those business structures?
Obtaining Equity Capital
Sole Proprietorship
Invest more personal funds
Sell personal assets to raise $$$
Mortgage personal property Assets used as securities
are at risk if the business fails.
Other personal assets at risk
Change business structure Partnership
Corporation
Partnership
Partners usually invest personal resources in the business in order to balance/share risk. Not mandatory for new
partners
A formal partnership agreement identifies the financial contributions of each partner and how profits will be shared.
If the assets of one partner are not enough to cover business debts, assets from other partners can be taken.
Owner gives up individual control over management and decision-making.
Corporation
Can raise capital quickly because the amount of money invested is much smaller
Stockholders are not involved in day-to-day management of business.
Investors are protected financially.
How is debt capital categorized?
Obtaining Debt Capital
How is debt capital categorized?
Short-Term Debt Capital
Must be repaid within a year Often 30-, 60-,
or 90-day loans
Usually obtained from a bank or other lending institutions
How is debt capital categorized?
Short-Term Debt Capital
Business must supply bank with adequate financial information.
Bank usually obtains a financial report on the business from a credit company.
If the bank considers the business to be a good credit risk, the bank will grant a loan or a line of credit. Specific amount, set time period
Business owner(s) must sign a promissory note. Unconditional written promise to pay the lender a certain
sum of money at a particular time or on demand
How is debt capital categorized?
Long-Term Debt Capital
Money borrowed for longer than a year
Usually obtained through: Long-term notes Bonds
How is debt capital categorized?
Term Loans
Also known as long-term notes; medium- or long-term financing used for business operations or for improving fixed assets
Written for periods from 1 to 15 years … or longer
Significant source of capital for most businesses
Banks / lenders require the principal and interest to be repaid on a regular basis over the life of the note.
How is debt capital categorized?
Bonds
Long-term written promise sold by the business to investors that promises payment of a definite sum of money at a specified time Business receives the amount of the bond when it is
initially sold. Must pay bondholder the borrowed amount (principal) at
the bond’s maturity date Business pays bondholder interest at a specified rate at
certain intervals Bonds do NOT represent a share of ownership;
they are investments. Bondholders are creditors & have priority claim
before stockholders.
Considerations when Obtaining Capital
3 things to consider…
Obtaining Capital
Considerations when Obtaining Capital
Cost of Capital
Costly to sell bonds, long-term notes, or issue stock Must file forms,
obtain approval, make agreements, find buyers
Usually only large or highly successful firms even consider stocks/bonds
Considerations when Obtaining Capital
Interest Rates
Rates fluctuate monthly, weekly, even daily
Best to borrow when rates are low (cheaper)
When rates are high, businesses usually borrow short-term debts.
Considerations when Obtaining Capital
Influence of Contributors
Short-term creditors usually have no control over management and operations of business.
Long-term credit agreements are tied to asset claims & may impose limitations on those assets.
Partners / stockholders gain a voice in control of business.
Sources of Capital Avaialble to Businesses
Where do you get the money?
Sources of Capital
Sources of Capital Avaialble to Businesses
Sources of Capital
Banks - most popular source of capital Small Loan Companies - firms that lend
money to “higher risk” businesses Venture Capitalists
People or companies that lend large sums of money to promising new or growing businesses
Usually ask for a percentage of ownership rights in the company
Demand a carefully developed business plan that shows high potential for success
Sources of Capital Avaialble to Businesses
Sources of Capital
Commercial Credit Companies - lend money on current assets, such as accounts receivable
Sales Finance Companies - used primarily when installment sales are involved
Insurance Companies - portions of funds collected from policy holders may be loaned to firms
Individual Investors / Investment Groups Pension Funds - retirement funds collected
from employees may be loaned to firms
Sources of Capital Avaialble to Businesses
Sources of Capital
Investment Banking Organizations Specialize in selling new security issues to the
public Helps a business raise large sums of capital
through stocks / bonds Can assist a rapidly growing, privately held
company with IPO
Equipment Manufacturers Firms that do not lend money, but sell needed
equipment on an extended-time payment plan
1) Identify 2 methods of obtaining capital.
2) Debt capital can be categorized as _____ or _____ debt capital.
3) What are three (3) things to consider when obtaining capital?
4) List at least two (2) of the ten sources of capital discussed in class.
Closing Task!
So how much money do you need?
Rent / mortgage Facility
maintenance Utilities Transportation
Wages & Salaries
Equipment Supplies Raw Materials Inventory
Physical LocationCost of Product /
Service
FOR THE REST OF CLASS…
1) Complete the finance worksheets – do some research & use realistic figures.
2) Decide how much money your business needs to start up & operate for six months. Write the ‘Financial Plan’ section of your business plan.