Finding Sources of Capital: Finding Sources of Capital:

Debt and Equity Debt and Equity

If you don’t know who the fool is If you don’t know who the fool is on the deal, it’s you!on the deal, it’s you!...Michael ...Michael

WolffWolff

Planning for Capital NeedsPlanning for Capital Needs

CapitalCapital: any form of wealth employed to : any form of wealth employed to produce more wealthproduce more wealth

Fixed capitalFixed capital: to purchase a company’s : to purchase a company’s permanent or fixed assets such as land, permanent or fixed assets such as land, buildings, computers, and equipmentbuildings, computers, and equipment

Working capitalWorking capital: to support a business’s : to support a business’s short-term operations short-term operations

Growth capitalGrowth capital: to finance a company’s : to finance a company’s growth or its expansion in a new growth or its expansion in a new direction direction

Equity vs Debt CapitalEquity vs Debt Capital Equity capitalEquity capital: :

represents the represents the personal investment personal investment of the owner (s) of a of the owner (s) of a companycompany

Debt capitalDebt capital: the : the financing that a financing that a small business small business owner has borrowed owner has borrowed and must repay with and must repay with interest interest

Sources of Equity CapitalSources of Equity Capital Personal savingsPersonal savings Friends and family membersFriends and family members AngelsAngels PartnersPartners Small Business Investment Small Business Investment

Companies (SBICs)Companies (SBICs) Venture capital companiesVenture capital companies Minority Financing SourcesMinority Financing Sources Banks and Credit Banks and Credit

Unions/SBAUnions/SBA

AngelsAngels Private investorsPrivate investors, wealthy individuals, , wealthy individuals,

entrepreneurs themselves, who provide entrepreneurs themselves, who provide money in exchange for equity stakesmoney in exchange for equity stakes

Ranging from $10,000 to $2MRanging from $10,000 to $2M Every year: 230,000 angels , $23 B, Every year: 230,000 angels , $23 B,

50,000 companies50,000 companies Average: 10% of opportunities, 2 Average: 10% of opportunities, 2

investments per year, $80,000 in 3.5 firmsinvestments per year, $80,000 in 3.5 firms Angel networksAngel networks: 200: 200 Patient money Patient money

Venture Capital CompaniesVenture Capital Companies

$3-10M$3-10M Competent Competent

managementmanagement Competitive edgeCompetitive edge Growth industryGrowth industry Viable exit strategyViable exit strategy Intangible factorsIntangible factors

Debt FinancingDebt Financing Commercial banksCommercial banks Non-banksNon-banks Federally-Federally-

sponsored sponsored programsprograms

State and Local State and Local Development Development ProgramsPrograms

Internal methods of Internal methods of financingfinancing

Commercial BanksCommercial Banks Short-term loansShort-term loans

Commercial loansCommercial loans

Lines of creditLines of credit

Floor-planningFloor-planning Intermediate and Intermediate and

long-term loanslong-term loans

Installment loanInstallment loan

Term loanTerm loan

Non-Bank SourcesNon-Bank Sources Minority Enterprise Small Business Minority Enterprise Small Business

Investment Companies (MESBICs)Investment Companies (MESBICs) Dollar Diva (Teen women)Dollar Diva (Teen women) Ernst & Young’s Entrepreneur of the Year Ernst & Young’s Entrepreneur of the Year

ProgramProgram NFIB NFIB NFTENFTE SBASBA Youth in Action AwardsYouth in Action Awards

Federally Sponsored Federally Sponsored ProgramsPrograms

Economic Development AdministrationEconomic Development Administration Department of Housing and Urban DevelopmentDepartment of Housing and Urban Development Department of Agriculture’s Rural Cooperative Department of Agriculture’s Rural Cooperative

ServiceService Small Business Innovation Research ProgramSmall Business Innovation Research Program Small Business Technology Transfer ProgramSmall Business Technology Transfer Program Small Business AdministrationSmall Business Administration

Small Business Small Business AdministrationAdministration

Low Doc Loan ProgramLow Doc Loan Program SBA Express ProgramSBA Express Program 7A Loan Guaranty Program7A Loan Guaranty Program CAPLine ProgramCAPLine Program Loans Involving International TradeLoans Involving International Trade Section 504 Certified Development Section 504 Certified Development

Company ProgramCompany Program Microloan ProgramMicroloan Program Prequalification Loan ProgramPrequalification Loan Program Disaster LoansDisaster Loans

State and Local Loan State and Local Loan Development ProgramsDevelopment Programs

Capital access programsCapital access programs: encourages : encourages lending institutions to make loans to lending institutions to make loans to businesses that do not qualify for businesses that do not qualify for traditional financing because of higher traditional financing because of higher riskrisk

Revolving loan fundsRevolving loan funds: offered by : offered by communities that combine private communities that combine private and public funds to make loans to and public funds to make loans to small businesses, often at below-small businesses, often at below-market interest ratesmarket interest rates

Internal MethodsInternal Methods

Factoring accounts Factoring accounts receivablereceivable

LeasingLeasing Credit cards Credit cards