Sources of Funds:Equity and Debt

Sources of Funds:Equity and Debt

The “Secrets” to Successful The “Secrets” to Successful FinancingFinancing

1. Choosing the right sources of capital is a 1. Choosing the right sources of capital is a decision that will influence a company for a decision that will influence a company for a lifetime.lifetime.

2. The money is out there; the key is knowing 2. The money is out there; the key is knowing where to look.where to look.

3. Creativity counts. Entrepreneurs have to be as 3. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are creative in their searches for capital as they are in developing their business ideas.in developing their business ideas.

The “Secrets” to Successful The “Secrets” to Successful FinancingFinancing

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4. The World Wide Web puts at entrepreneur’s 4. The World Wide Web puts at entrepreneur’s fingertips vast resources of information that fingertips vast resources of information that can lead to financing. can lead to financing.

5. Be thoroughly prepared before approaching 5. Be thoroughly prepared before approaching lenders and investors. lenders and investors.

6. Entrepreneurs should not underestimate the 6. Entrepreneurs should not underestimate the importance of making sure that the importance of making sure that the “chemistry” between themselves, their “chemistry” between themselves, their companies, and their funding sources is a good companies, and their funding sources is a good one. one.

Three Types of CapitalThree Types of Capital

nn FixedFixed -- used to purchase the permanent or used to purchase the permanent or fixed assets of the business (e.g., buildings, land, fixed assets of the business (e.g., buildings, land, equipment, etc.)equipment, etc.)

nn WorkingWorking -- used to support the small company’s used to support the small company’s normal shortnormal short--term operations (e.g., buy term operations (e.g., buy inventory, pay bills, wages, salaries, etc.)inventory, pay bills, wages, salaries, etc.)

nn GrowthGrowth -- used to help the small business used to help the small business expand or change its primary direction.expand or change its primary direction.

CapitalCapital is any form of wealth employed to produce more is any form of wealth employed to produce more wealth for a firm.wealth for a firm.

Equity CapitalEquity Capital

nn Represents the personal investment of the Represents the personal investment of the owner(s) in the business.owner(s) in the business.

nn Is called Is called risk capital risk capital because investors because investors assume the risk of losing their money if the assume the risk of losing their money if the business fails.business fails.

nn Does Does notnot have to be repaid with interest like have to be repaid with interest like a loan does.a loan does.

nn Means that an entrepreneur must give up Means that an entrepreneur must give up some ownership in the company to outside some ownership in the company to outside investors.investors.

Sources of Equity Sources of Equity FinancingFinancing

nn Personal savingsPersonal savingsnn Friends and family membersFriends and family membersnn AngelsAngelsnn PartnersPartnersnn CorporationsCorporationsnn Venture capital companiesVenture capital companiesnn Public stock salePublic stock sale

Personal SavingsPersonal Savings

nn The The firstfirst place an entrepreneur place an entrepreneur should look for money. should look for money.

nn The most common source of equity The most common source of equity capital for starting a business.capital for starting a business.

nn Outside investors and lenders Outside investors and lenders expect the entrepreneur to put expect the entrepreneur to put some of her own capital into the some of her own capital into the business business beforebefore investing theirs.investing theirs.

Friends and Family MembersFriends and Family Members

nn After emptying her own pockets, an After emptying her own pockets, an entrepreneur should turn to those entrepreneur should turn to those most likely to invest in the business most likely to invest in the business ––friends and family members.friends and family members.

nn Survey: 10% of business owners turn Survey: 10% of business owners turn to family and friends for capital. to family and friends for capital.

nn Careful!!! Inherent dangers lurk in Careful!!! Inherent dangers lurk in family/friendly business deals, family/friendly business deals, especiallyespecially those that flop.those that flop.

Friends and Family MembersFriends and Family Members

nn Guidelines for Family and Friendship Guidelines for Family and Friendship Financing Deals:Financing Deals:ww Consider the impact of the investment on Consider the impact of the investment on

everyone involved. Keep the arrangement everyone involved. Keep the arrangement “strictly business.”“strictly business.”ww Settle the details up front.Settle the details up front.ww Create a written contract.Create a written contract.ww Treat the money as “bridge financing.” Treat the money as “bridge financing.” ww Develop a payment schedule that suits both Develop a payment schedule that suits both

parties. parties.

AngelsAngels

nn Angels Angels -- private investors who back private investors who back emerging entrepreneurial companies emerging entrepreneurial companies with their own money.with their own money.

nn Fastest growing segment of the small Fastest growing segment of the small business capital market. business capital market.

nn An excellent source of “patient money” An excellent source of “patient money” for investors needing relatively small for investors needing relatively small amounts of capital amounts of capital –– often less than often less than $500,000.$500,000.

AngelsAngels

nn Key: finding them! Key: finding them! nn Angels almost always invest their money Angels almost always invest their money

locally and can be found through locally and can be found through “networks.”“networks.”

nn The typical angel accepts 30% of the The typical angel accepts 30% of the proposals presented to him and has proposals presented to him and has invested an average of $131,000 in 3.5 invested an average of $131,000 in 3.5 businesses. businesses.

Corporate Venture CapitalCorporate Venture Capital

nn 30% of all venture capital investments 30% of all venture capital investments come from corporations.come from corporations.

nn About 900 large corporations across the About 900 large corporations across the globe invest in startglobe invest in start--up companies.up companies.

nn Capital infusions are just one benefit; Capital infusions are just one benefit; corporate partners may share marketing corporate partners may share marketing and technical expertise. and technical expertise.

Venture Capitalist CompaniesVenture Capitalist Companies

nn More than 3,000 venture capital firms More than 3,000 venture capital firms operate across the United States. operate across the United States.

nn Most venture capitalists seek investments Most venture capitalists seek investments in the $3,000,000 in the $3,000,000 -- $10,000,000 range in $10,000,000 range in companies with highcompanies with high--growth and highgrowth and high--profit potential. profit potential.

nn Business plans are subjected to an Business plans are subjected to an extremely rigorous review extremely rigorous review –– less than 1% less than 1% accepted.accepted.

Venture Capitalist CompaniesVenture Capitalist Companies

nn Most venture capitalists take an active Most venture capitalists take an active role in managing the companies in which role in managing the companies in which they invest.they invest.

nn Many venture capitalists focus their Many venture capitalists focus their investments in specific industries with investments in specific industries with which they are familiar.which they are familiar.

nn Most often, venture capitalists invest in a Most often, venture capitalists invest in a company across several stages.company across several stages.

Venture Capital Financing

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What Do Venture CapitalWhat Do Venture CapitalCompanies Look For?Companies Look For?

nn Competent managementCompetent managementnn Competitive edgeCompetitive edgenn Growth industryGrowth industrynn Viable exit strategyViable exit strategynn “Intangibles”“Intangibles”

Going PublicGoing Public

nn Initial public offering (IPO) Initial public offering (IPO) -- when a when a company raises capital by selling shares company raises capital by selling shares of its stock to the public for the first time. of its stock to the public for the first time.

nn Typical year: about 550 companies make Typical year: about 550 companies make IPOsIPOs..

nn Few companies with sales below $10 Few companies with sales below $10 million in annual sales make million in annual sales make IPOsIPOs. .

Initial Public Offerings

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Advantages of “Going Public”Advantages of “Going Public”

nn Ability to raise large amounts of Ability to raise large amounts of capitalcapital

nn Improved corporate imageImproved corporate imagenn Improved access to future financingImproved access to future financingnn Attracting and retaining key Attracting and retaining key

employeesemployeesnn Using stock for acquisitionsUsing stock for acquisitionsnn Listing on a stock exchangeListing on a stock exchange

Disadvantages of “Going Public”Disadvantages of “Going Public”

nn Dilution of founder’s ownershipDilution of founder’s ownershipnn Loss of controlLoss of controlnn Loss of privacyLoss of privacynn Reporting to the SECReporting to the SECnn Filing expensesFiling expensesnn Accountability to shareholdersAccountability to shareholdersnn Pressure for shortPressure for short--term term

performanceperformancenn TimingTiming

The Registration ProcessThe Registration Process

nn Choose the underwriterChoose the underwriternn Negotiate a letter of intentNegotiate a letter of intentnn Prepare the registration statementPrepare the registration statementnn File with the SECFile with the SECnn Wait to “go effective”Wait to “go effective”nn Meet state requirementsMeet state requirements

Debt FinancingDebt Financing

nn Must be repaid with interest.Must be repaid with interest.nn Is carried as a liability on the Is carried as a liability on the

company’s balance sheet.company’s balance sheet.nn 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 numerous.of debt financing are more numerous.

nn 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.tradeoff.

Sources of Debt CapitalSources of Debt Capital

nn Commercial banksCommercial banks

Commercial BanksCommercial Banks

nn ShortShort--term loansterm loansww Commercial loansCommercial loansww Lines of creditLines of creditww Floor planningFloor planning

nn Intermediate and longIntermediate and long--term term loansloansww Installment loans and contractsInstallment loans and contracts

...the heart of the financial market for small businesses!...the heart of the financial market for small businesses!

Sources of Debt CapitalSources of Debt Capital

nn Commercial banksCommercial banksnn AssetAsset--based lendersbased lenders

AssetAsset--Based BorrowingBased Borrowing

nnDiscounting accounts Discounting accounts receivablereceivable

AccountsReceivable

nn Inventory financingInventory financing

Sources of Debt CapitalSources of Debt Capital

nn Commercial banksCommercial banks

nn Trade creditTrade creditnn Equipment suppliersEquipment suppliersnn Commercial finance companiesCommercial finance companiesnn Saving and loan associationsSaving and loan associations

nn AssetAsset--based lendersbased lenders $$

Sources of Debt CapitalSources of Debt Capital

nn Stock brokerage housesStock brokerage housesnn Insurance companiesInsurance companiesnn Credit unionsCredit unionsnn BondsBondsnn Private placementsPrivate placementsnn Small Business Investment Companies Small Business Investment Companies

((SBICsSBICs))nn Small Business Lending Companies Small Business Lending Companies

((SBLCsSBLCs))

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Sources of Debt CapitalSources of Debt Capital

nn Economic Development Administration (EDA)Economic Development Administration (EDA)nn Department of Housing and Urban Development Department of Housing and Urban Development

(HUD)(HUD)nn U.S. Department of Agriculture’s Rural BusinessU.S. Department of Agriculture’s Rural Business--

Cooperative ServiceCooperative Servicenn Local Development Companies (Local Development Companies (LDCsLDCs))nn Small Business Innovation Research (SBIR) Small Business Innovation Research (SBIR) nn Small Business Technology Transfer programsSmall Business Technology Transfer programsnn Small Business Administration (SBA)Small Business Administration (SBA)

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Federally Sponsored Programs:Federally Sponsored Programs:

Small Business Administration Small Business Administration Loan ProgramsLoan Programs

nn Low Doc Loan ProgramLow Doc Loan Programnn SBASBAExpressExpress ProgramProgramnn 7(A) Loan Guarantee Program 7(A) Loan Guarantee Program –– the the

most popular SBA loan programmost popular SBA loan programnn CAPLine CAPLine ProgramProgramnn International Trade ProgramsInternational Trade Programsww Export Working Capital ProgramExport Working Capital Programww International Trade ProgramInternational Trade Program

SBA Loan ProgramsSBA Loan Programs

nn Section 504 Certified Development Section 504 Certified Development Company ProgramCompany Program

nn MicroloanMicroloan ProgramProgramnn Prequalification Prequalification Loan ProgramLoan Programnn Disaster LoansDisaster Loansnn 8(A) Loan Program8(A) Loan Program

State and Local Loan ProgramsState and Local Loan Programs

nn Capital Access Programs (Capital Access Programs (CAPsCAPs) ) –– now now offered in 22 states and are designed to offered in 22 states and are designed to encourage lenders to make loans to encourage lenders to make loans to businesses that do not qualify for businesses that do not qualify for traditional financing. traditional financing.

nn Revolving Loan Fund (Revolving Loan Fund (RLFsRLFs) ) –– combine combine private and public funds to make small private and public funds to make small business loans. business loans.

Internal Methods of FinancingInternal Methods of Financing

nn Factoring Factoring -- selling accounts receivable selling accounts receivable outrightoutright

nn Leasing assets rather than buying themLeasing assets rather than buying themnn Credit cardsCredit cards