BA250 Chapter 7 Powerpoint

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Chapter 7Chapter 7

How to Obtain the How to Obtain the Right Financing for Right Financing for

Your BusinessYour Business

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

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How To Obtain The Right Financing For Your Business

Importance Of Proper FinancingImportance Of Proper FinancingEstimating NeedsEstimating NeedsDebt Vs. Equity StructureDebt Vs. Equity StructureTypes/Sources Of Equity Types/Sources Of Equity & Debt& DebtWhat Lender Looks ForWhat Lender Looks For

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McGraw-Hill/Irwin

Capital RequirementsCapital Requirements

A

FEDER AL RESERVE NO TE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

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W A SHINGT O N, D .C.

TH I S N O TE IS LE G A L T E N D E R

F O R A LL D E B T S , P U B L I C AN D P R IV A T E

S E R I ES

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H 293 Fixed AssetsFixed AssetsA

FEDER AL RESERVE NO TE

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H 293 Working CapitalWorking Capital

Current AssetsCurrent Assets

-Current LiabilitiesCurrent Liabilities

Working CapitalWorking CapitalPhotoLink/Getty Images

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Types Of FinancingTypes Of Financing

Debt- Lender’s Income Debt- Lender’s Income Does Does NotNot Vary With Vary With Business SuccessBusiness Success

Equity- Stockholder’s Equity- Stockholder’s Income Income DoesDoes Vary With Vary With Business SuccessBusiness Success

PhotoLink/Getty Images

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Cash BudgetsCash Budgets$

$

$

$$ Project Working Capital NeedsProject Working Capital Needs$

$

$

$$ Reflects Reflects WhenWhen$

$

$

$$ Revenue CollectedRevenue Collected$

$

$

$$ Expenses PaidExpenses Paid$

$

$

$$ Considers Seasonal Considers Seasonal Revenue FluctuationsRevenue Fluctuations

$

$

$

$$ Used For Obtaining Working Used For Obtaining Working Capital (Line Of Credit) LoansCapital (Line Of Credit) Loans

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Equity FinancingEquity FinancingOwner’s Claim Share Of Owner’s Claim Share Of

Firm’s AssetsFirm’s AssetsProprietorship/Partnership Proprietorship/Partnership

Equals Owner’s Personal Equals Owner’s Personal AssetsAssets

Corporation = Stock, Corporation = Stock, 1 Share = 1 Vote 1 Share = 1 VoteCommonCommonPreferredPreferred

Investment Liquidity Investment Liquidity Depends On MarketDepends On Market


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Common StockholdersCommon Stockholders

Real Owners Of Real Owners Of

CorporationCorporation

Financial Claim Is Financial Claim Is AfterAfter

All Others All Others

Right To VoteRight To Vote

Control ManagementControl Management Royalty-Free/CORBIS

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Small BusinessSmall BusinessShare Of StockShare Of Stock

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Preferred StockholdersPreferred StockholdersClaim To ProfitsClaim To Profits

oBeforeBefore Common Stock Common Stock DividendsDividends

oNot Legally EnforceableNot Legally Enforceable

No Voting RightsNo Voting RightsFixed Par Value & Fixed Par Value &

DividendDividendCumulative DividendCumulative Dividend

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Small CompanySmall CompanyOffering Registration (SCOR)Offering Registration (SCOR)

Raise Up To $1 Million Raise Up To $1 Million

TradedTraded

oAMEXAMEX

oNASDAQ- OTCNASDAQ- OTC

Ryan McVay/Getty Images

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Sources ofSources ofEquity FinancingEquity Financing

SelfSelfSmall Business Investment Small Business Investment

Companies (SBICs)Companies (SBICs)Venture CapitalistsVenture CapitalistsAngel CapitalistsAngel CapitalistsOtherOther

oBusiness IncubatorsBusiness IncubatorsoEmployee Stock Ownership Employee Stock Ownership

Plans (ESOPs)Plans (ESOPs)oCustomersCustomers


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BarteringBarteringCompanies Swapping Companies Swapping Items Of Equal ValueItems Of Equal ValueUsesUses

Business TravelBusiness TravelDebt CollectionDebt CollectionClosing A SaleClosing A SaleEmployee Perks/BonusesEmployee Perks/BonusesLine Of CreditLine Of Credit

Subject To TaxSubject To Tax

Artville/Getty Images

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AccountingAccountingFor Bartering For Bartering

Items Dissimilar- Items Dissimilar- Gain vs. Loss Gain vs. Loss

Items Alike- Use Book Items Alike- Use Book Value Of Old Item Value Of Old Item

Janis Christie/Getty Images

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Debt FinancingDebt FinancingComes From LendersComes From Lenders

Must Be RepaidMust Be Repaid

oAt Specified Interest RateAt Specified Interest Rate

oWithin Agreed-Upon Time SpanWithin Agreed-Upon Time Span

Legal Claim On Assets Legal Claim On Assets Before StockholdersBefore Stockholders

Equity = Safety Net For Equity = Safety Net For LendersLenders


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Debt Financing Advantages Debt Financing Advantages

1)1) Cost Of Debt Lower Than Cost Of Debt Lower Than EquityEquity

2)2) Interest Payments DeductibleInterest Payments Deductible3)3) Debt Funding Allows For Debt Funding Allows For

More Capital To Be More Capital To Be Raised In Addition Raised In Addition To Equity To Equity

4)4) Since Debt Payment Is Since Debt Payment Is Fixed It Allows Owner To Fixed It Allows Owner To Keep Remaining Profits Keep Remaining Profits

5)5) LeverageLeverageRoyalty-Free/CORBIS

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Debt SecuritiesDebt SecuritiesBondBond

oPublicly IssuedPublicly Issued

oLarge CompaniesLarge Companies

LoanLoanoCommercial BanksCommercial Banks

oInsurance CompaniesInsurance Companies

oFinance CompaniesFinance Companies

Royalty-Free/CORBIS

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Securities’ MaturitiesSecurities’ Maturities

Short-Term- Less Short-Term- Less Than 1 Year Than 1 Year

Intermediate- 1 To Intermediate- 1 To 5 Years 5 Years

Long-Term- 5 Years+Long-Term- 5 Years+

Royalty-Free/CORBIS

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BondsBondsStandard Standard

DenominationDenomination

Method Of Interest Method Of Interest PaymentPayment

Method Of Principal Method Of Principal PaymentPayment

Royalty-Free/CORBIS

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Types Of LoansTypes Of LoansMortgage- Secured By Real Mortgage- Secured By Real

EstateEstate

Chattel Mortgage- Collateral Chattel Mortgage- Collateral Other Than Land, e.g., Other Than Land, e.g., Machinery, Vehicles, InventoryMachinery, Vehicles, Inventory

Asset-Based- Secured By Asset-Based- Secured By AR & Inventory AR & Inventory

Unsecured- Personal Unsecured- Personal GuaranteesGuarantees

Royalty-Free/CORBIS

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Sources Of Debt FinancingSources Of Debt Financing

Trade CreditTrade Credit

Commercial/Other Commercial/Other

Financial Institutions- Financial Institutions-

Line Of Credit Line Of Credit

Credit CardsCredit Cards

Insurance CompaniesInsurance Companies


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Suppliers OfSuppliers OfSmall Firm CreditSmall Firm Credit

Other3%

Banks83%

Family & Friends

6%

Finance Cos.8%

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Traditional SourcesTraditional SourcesOf Small Firm CreditOf Small Firm Credit

13%

27%18%

11%

10% 21%

Line Of Credit

Mortgage

Vehicle

Equipment

Lease

Other

Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

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Non-Traditional SourcesNon-Traditional SourcesOf Small Firm CreditOf Small Firm Credit

46%

14%6%

34%

Owner Loan

Personal CreditCard

Business CreditCard

Unknown

Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

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SmalSmalllBusiness AdministrationBusiness Administration

Guaranteed Loans- 7(a) = 30 Guaranteed Loans- 7(a) = 30 to 40% Of Long-Term Loansto 40% Of Long-Term Loans

Purchase Land, Buildings, Purchase Land, Buildings, EquipmentEquipmentWorking CapitalWorking CapitalRefinance Existing DebtRefinance Existing DebtSeasonal Lines Of CreditSeasonal Lines Of Credit

Specialized ProgramsSpecialized ProgramsSBICsSBICsU.S. Department Of U.S. Department Of

AgricultureAgriculture


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SBASBARequired DocumentsRequired Documents

Narrative Business PlanNarrative Business PlanResumesResumesLoan RequestLoan Request

How To Be UsedHow To Be UsedList Of AssetsList Of Assets

Financial Statement- 3 YearsFinancial Statement- 3 YearsFirm’sFirm’sPersonalPersonal

CollateralCollateral

Royalty-Free/CORBIS

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Lenders Want To KnowLenders Want To KnowStartupStartup

oCan You Live Without Can You Live Without Income From Business?Income From Business?

oLoan Repayment?Loan Repayment?

oCollateral?Collateral?

ExistingExistingoTrack RecordTrack Record

oFuture Difference?Future Difference?