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Sources of Financing:

Debt and Equity

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

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Planning for Capital Needs

Capital: any form of wealth employed toproduce more wealth

Fixed capital: to purchase a company’spermanent or fixed assets such as land,buildings, computers, and equipment

Working capital: to support a business’sshort-term operations

Growth capital: to finance a company’sgrowth or its expansion in a new direction

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Equity vs Debt Capital

Equity capital:represents thepersonal investment

of the owner (s) of acompany

Debt capital: thefinancing that a small

business owner hasborrowed and mustrepay with interest

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Sources of Equity Capital Personal savings

Friends and familymembers

 Angels Partners

Corporate venturecapital

 Venture capitalcompanies

Public stock sale

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 Angels

Private investors, wealthy individuals,entrepreneurs themselves, who provide moneyin 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

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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

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Debt Financing

Commercial banks

Non-banks

Federally-sponsored

programs

State and LocalDevelopment

Programs Internal methods of 

financing

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Commercial Banks

Short-term loans

Commercial loans

Lines of creditFloor-planning

Intermediate andlong-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 Agriculture’s 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 CompanyProgram

Microloan Program

Prequalification Loan Program

Disaster Loans

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State and Local Loan

Development Programs Capital access programs: encourages

lending institutions to make loans to

businesses that do not qualify fortraditional financing because of higher risk 

Revolving loan funds: offered bycommunities that combine private andpublic funds to make loans to smallbusinesses, often at below-market interestrates

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Internal Methods

Factoring accounts receivable Leasing

Credit cards