Sources of Financing: Sources of Financing: Debt and Equity Debt and Equity

The variety of commercial funding sources The variety of commercial funding sources is huge. The trick is knowing them and is huge. The trick is knowing them and

matching them to the appropriate matching them to the appropriate applicant!applicant!

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 company or outside company or outside investorsinvestors

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

Sources of Equity CapitalSources of Equity Capital Personal savingsPersonal savings Friends and family Friends and family

membersmembers AngelsAngels PartnersPartners Corporate venture Corporate venture

capitalcapital Venture capital Venture capital

companiescompanies Public stock salePublic stock sale Private Placements & Private Placements &

SyndicationsSyndications

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 invest $23 B in Every year: 230,000 angels invest $23 B in

50,000 companies50,000 companies Average: Angels invest in 10% of Average: Angels invest in 10% of

opportunities, ave investments, each, of opportunities, ave investments, each, of $80,000 in 3.5 firms$80,000 in 3.5 firms

Angel networksAngel networks: 200 : 200

Venture Capital CompaniesVenture Capital Companies

$3-10M ave $3-10M ave investmentinvestment

Venture Capitalists Venture Capitalists want to see:want to see:

Competent Competent managementmanagement

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

Public Stock SalePublic Stock Sale

Advantages Advantages Ability to raise large amounts of Ability to raise large amounts of

capitalcapital Improved corporate imageImproved corporate image Improved access to future financingImproved access to future financing Use of stock for acquisitionsUse of stock for acquisitions Listing on a stock exchangeListing on a stock exchange

Public Stock SalePublic Stock SaleDisadvantagesDisadvantages Dilution of ownershipDilution of ownership Loss of controlLoss of control Loss of privacyLoss of privacy Reporting to SECReporting to SEC Filing expensesFiling expenses Accountability to shareholdersAccountability to shareholders Pressure for short-term performancePressure for short-term performance Demands of time and timingDemands of time and timing

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 Asset-based lendersAsset-based lenders Vendor financingVendor financing Equipment suppliersEquipment suppliers Commercial finance companiesCommercial finance companies Savings and loan associationsSavings and loan associations Stock brokerage housesStock brokerage houses Insurance companiesInsurance companies Credit unionsCredit unions BondsBonds Private placementsPrivate placements Small business investment companiesSmall business investment companies Small business lending companiesSmall business lending companies

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 Micro-loan Program ($25-50K)Micro-loan Program ($25-50K) 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 receivableFactoring accounts receivable LeasingLeasing Credit card Factoring Credit card Factoring Disposition by Auction, etcDisposition by Auction, etc Monetization of LT cash flowsMonetization of LT cash flows Financing non-realty assets, like Financing non-realty assets, like

securitiessecurities