Sources of Financing: Debt and Equity

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Sources of Financing Debt and Equity

• If you dont know who the fool is on the deal,
  its you!...Michael Wolff

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Planning for Capital Needs

• Capital any form of wealth employed to produce
  more wealth
• Fixed capital to purchase a companys permanent
  or fixed assets such as land, buildings,
  computers, and equipment
• Working capital to support a businesss
  short-term operations
• Growth capital to finance a companys growth or
  its expansion in a new direction

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Equity vs Debt Capital

• Equity capital represents the personal
  investment of the owner (s) of a company
• Debt capital the financing that a small business
  owner has borrowed and must repay with interest

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Sources of Equity Capital

• Personal savings
• Friends and family members
• Angels
• Partners
• Corporate venture capital
• Venture capital companies
• Public stock sale

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Angels

• Private investors, wealthy individuals,
  entrepreneurs themselves, who provide money in
  exchange for equity stakes
• Ranging from 10,000 to 2M
• Every year 230,000 angels , 23 B, 50,000
  companies
• Average 10 of opportunities, 2 investments per
  year, 80,000 in 3.5 firms
• Angel networks 200
• Patient money

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Venture Capital Companies

• 3-10M
• Competent management
• Competitive edge
• Growth industry
• Viable exit strategy
• Intangible factors

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Public Stock Sale

• Advantages
• Ability to raise large amounts of capital
• Improved corporate image
• Improved access to future financing
• Use of stock for acquisitions
• Listing on a stock exchange

8
Public Stock Sale

• Disadvantages
• Dilution of ownership
• Loss of control
• Loss of privacy
• Reporting to SEC
• Filing expenses
• Accountability to shareholders
• Pressure for short-term performance
• Demands of time and timing

9
Debt Financing

• Commercial banks
• Non-banks
• Federally-sponsored programs
• State and Local Development Programs
• Internal methods of financing

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Commercial Banks

• Short-term loans
• Commercial loans
• Lines of credit
• Floor-planning
• Intermediate and long-term loans
• Installment loan
• Term loan

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Non-Bank Sources

• Asset-based lenders
• Vendor financing
• Equipment suppliers
• Commercial finance companies
• Savings and loan associations
• Stock brokerage houses
• Insurance companies
• Credit unions
• Bonds
• Private placements
• Small business investment companies
• Small business lending companies

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Federally Sponsored Programs

• Economic Development Administration
• Department of Housing and Urban Development
• Department of Agricultures Rural Cooperative
  Service
• Small Business Innovation Research Program
• Small Business Technology Transfer Program
• Small Business Administration

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Small Business Administration

• Low Doc Loan Program
• SBA Express Program
• 7A Loan Guaranty Program
• CAPLine Program
• Loans Involving International Trade
• Section 504 Certified Development Company Program
• Microloan Program
• Prequalification Loan Program
• Disaster Loans

14
State and Local Loan Development Programs

• Capital access programs encourages lending
  institutions to make loans to businesses that do
  not qualify for traditional financing because of
  higher risk
• Revolving loan funds offered by communities
  that combine private and public funds to make
  loans to small businesses, often at below-market
  interest rates

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Internal Methods

• Factoring accounts receivable
• Leasing
• Credit cards