Sources of Financing (Equity and Debt)

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Secrets to financing: chose right source of capital/ knowing where to look/ raising takes time & effort/ creativity counts/ use web for financing & research/ ask on social media/ prepare for investors/ positive relationships/ exit strategy

Layered financing- technique of raising capital from multiple sources

Capital- any form of wealth employed to produce more wealth

Equity capital- represents the personal investment of the owners of a company (risk capital)

Debt Capital- financing that an entrepreneurs borrows and must repay with interest

Sources of equity financing

• Personal savings (bootstrapping- use savings to have a low cost startup to launch business)

• Family/ Friends

• Crowdfunding (Raising capital through social media/ post pitches and investment terms for all)

  • Accredited investors- sustained net worth of 1 million or 200,000 annual income

• Accelerators (community /university sponsors programs provide seed capital/ additional support)

• Angels (private investors are wealthy individuals who invest in startups in exchange for equity stakes). Networking is key/ no cold calls- many use attorneys and accountants as gatekeepers. Angels use investor skills/ experience/ contacts to help them start up/ They wait for “patient money” within their investments.

• Venture Capital Companies- private/ for-profit organization pools money together/ purchases equity in startup/ sees potential in new businesses

  • Policies/ investment strategies: investment size & screening/ ownership & control/ stage of investment/ advice & contacts/ investment preferences

  • What their looking for: competent management/ competitive edge/ Growth industry/ viable exit strategy/ intangible factors

• Corporate Venture Capital- investing for strategic and financial reasons/ needs market maturity/ less risk

Public Stock Sale (Going Public)

• Initial public offering- raising equity capital by selling shares of stock to general public for first time

  • effective method but expensive/ time consuming and regulatory nightmares

• Investment bankers who underwrite public stock offerings typically look for established companies with: constantly high growth rates/ scalability/ strong record of earnings/ financial statements that meets standards/ solid position in a rapidly growing industry/ sound management team with experience

• Registration Process

  • Choose the underwriter (investment banker) a financial comp that prepares registration statement for an issue/ promoting company's stock to potential investors

  • Negotiate a letter of intent- agreement between the underwriter/ company that outlines the deal

  • Prepare registration statement- filed doc with the SEC that describes comp/ stock offering/ risk

  • File with the SEC and awaits the review of the Division of corporate finance

  • Road show- potential syndicate members sponsored by underwriter to promote company. IPO

  • Wait to go effective/ sign underwriting agreement/ meet state requirements

Source of debt financing (Borrows and must repay with interest/ acquire capital)

• retains capital but becomes liability on balance sheet/ must pay higher interest for higher risk

• Prime rate- interest rate that banks charge their most creditworthy customers

• Commercial Banks- conserved lending practices/ make loans for established businesses

  • concerned with past and future projections/ proof of stability/ ability to generate cash flow

• Short term loans: Home equity (collateral)/ commercial (Traditional)/ floor planning (big ticket items)

  • line of credit- Short term bank loan with a preset limit that provides working capital for operations

• Intermediate and Long term loans: Installment (monthly payments)/ term (restrictions on decisions)

*The small business administration (SBA) loan guarantee programs (gives entrepreneurs access they need to grow business)

• entrepreneurs that do not meet normal standards at conventional lending institutions

• requires cooperation/ list of terms/ average SBA loan is 12 years- longer terms are distinct advantage

• SBA real estate loans can extend p to 25 years (compared to 10-15 conventional loan) and working capital loans have maturities up to 7 years (compared to 2-5 years at most banks)- lower payments/ better suited because of the risk/ default rate is higher than standard rates/ less collateral than a bank

• 7(A)) loan guarantee program- loans made by private lenders to small businesses/ guarantee up to a ceiling

• Section 504 certified development company program- non profit org/ designed to promote growth in local communities by working with commercial banks/ SBA to make long term loans to small businesses

• Microloan Programs- aimed at entrepreneurs who can borrow money from $100-$50,000

• Capline Program- makes short term capital loans to growing companies to finance in inventory/ accounts receivable

• Export Express Program- makes short term capital loans to growing companies to finance in inventory/ accounts receivable

• Export Working Capital Program- designed to provide working capital to small exporters

• International trade program- small business engaging in international trade/ affected by competitors from imports

• Disaster loans- loans to small business devastated by some kind of financial or physical loss Nonbank sources of debt capital

  • Asset based lenders (Advanced rate- percentage of an assets value that a lender will lend) Vendor financing/ equipment suppliers/ commercial finance companies/ savings and loan associations

  • Stockbrokers (margin loans- use stocks/ bonds in borrowers portfolio as collateral)

    • Margin Maintenance call- value of borrowers portfolio drops/ broker calls the loan in/ requires borrower to put more cash/ securities as collateral

  • Credit Unions- non profit financial cooperation that promotes savings/ provides loans to members

  • Small Bus. investment comps- privately owned/ federal guaranteed long term venture capital to small business

• Capital Access Programs- encourages state lending for business that don't meet the standards due to risk

• Revolving loan funds- community based/ combine private and public funds for small business below market rates

• Community development financial institutions- designate portion of loan portfolios to unorthodox business owners *Other methods of financing:

  • Factoring accounts receivable (factor- financial institutions that buys business accounts receivable at a discount- may involve leasing or using credit cards)

  • Rollovers as Business Startups (ROBS) allows entrepreneurs to use retirement savings to fund business

  • Merchant cash advance- provider pre-purchases credit/ debit card receivables at a discount

  • Peer-to-peer lending- web based platforms create online community to provide funding

Loan Brokers- helping small companies find loans by tapping into network of lenders