© 2005 Mark T. Schenkel 1

Mark T. Schenkel, Ph. D.Belmont University

Financing Issues in New Ventures

Foundations of Entrepreneurship

© 2005 Mark T. Schenkel 2

Overview• Debt Financing- Interest-Bearing Instrument

Requiring Collateral (Asset)

• Equity Financing- Investor Receives Ownership Position

• Internal Financing

• Financing Usually A Combination Of Debt And Equity

© 2005 Mark T. Schenkel 3

Factors AffectingType Of Financing

1) Availability of Funds

2) Assets of Venture

3) Prevailing Interest Rates

4) Degree of Risk Perceived by Investors

© 2005 Mark T. Schenkel 4

Sources of External Funds

• Self• Family & Friends• Suppliers & Trade

Credit• Commercial Banks• Government Loan

Programs (SBA)

• R & D Limited Partnerships

• Venture Capital• Private Equity

Placements• Public Equity Offerings• Other Government

Programs (SBIR)

© 2005 Mark T. Schenkel 5

DEBT FINANCING

© 2005 Mark T. Schenkel 6

Short-term Debt

• Expected to be paid within one year

• Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.

© 2005 Mark T. Schenkel 7

Short-term Debt

• Trade debt• SBA• Banks• Asset-based lenders• Factors• “Bootstrapping”

© 2005 Mark T. Schenkel 8

Long-term Debt

• Beyond one year

• Most often used to fund fixed asset purchases

© 2005 Mark T. Schenkel 9

Long-term Debt

• Banks: term loans

• Leasing companies

• Real estate lenders

• SBA

© 2005 Mark T. Schenkel 10

Criteria for Lending by Bankers

1. Ability of the business to generate enough cash flow to easily make interest and principle payments

2. Entrepreneur’s ability to personally pay back the loan if the business fails

3. Assets to serve as collateral

Five “C’s”1. Character 4. Collateral

2. Capacity 5. Conditions

3. Capital

© 2005 Mark T. Schenkel 11

EQUITY FINANCING

© 2005 Mark T. Schenkel 12

Sources of Equity Funding

• Funding from the entrepreneur • Family and friends • Strategic partners • Angel investors • Private placement • SBICs • Venture Capitalists

© 2005 Mark T. Schenkel 13

Internal Funds• Profits• Sale of Assets- Rent Instead Of Purchase• Working Capital Reduction• Extended/Discounted Payment Terms- Suppliers• Accounts Receivable- Speed Up Collection• Reduction of:

– Inventory– Cash– Working Capital Items

© 2005 Mark T. Schenkel 14

Key Takeaway Points . . .

• Many avenues for financing. Creativity is the key . . . but all stakeholders should win in the process.

• Financing method should “make sense” for type of venture being pursued and goals of entrepreneur. Shop, shop, shop . . .

© 2005 Mark T. Schenkel 15

Key Takeaway Points . . .

• Funding sources can, will, and in most cases, should vary over time as a venture develops in order to maximize venture performance.

• Just as there are many sources of venture funding, so too are there many sources of business valuation. The complexity of valuation makes subjective judgment a critical factor.

© 2005 Mark T. Schenkel 16

Looking Ahead . . .

• Tuesday (3/27)– Guest Speaker: Allan Joiner (Sr. Vice

President, First American Financial Holdings)

• Thursday (3/29) & Tuesday (4/3)– Managing Cash Flow Exercise

• Thursday (3/29)– Signed Confidentiality Agreement due