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Financing Your

Business

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Chapter 19 Financing Your Business
Financing Your
Business

19.1 Financing the Small Business


Start-Up

19.2 Obtaining Financing and


Growth Capital

2
Financing Your Business

19.1

Describe the resources available to


entrepreneurs to start their businesses.
Compare and contrast sources of financing for
start-up ventures.
Describe the importance of financial planning.

Section 19.1 Financing the Small Business Start-Up 3


Financing Your Business

19.1

Entrepreneurs use their creative talents to secure


necessary resources to start their businesses.

Most start-up funds come from an entrepreneurs


personal resources; however, there are other
common sources of funding.

Section 19.1 Financing the Small Business Start-Up 4


Financing Your Business

19.1

bootstrapping venture capital


factor venture capitalists
equity capital debt capital
equity operating capital
risk capital line of credit
angel trade credit

Section 19.1 Financing the Small Business Start-Up 5


Financing Your Business

Entrepreneurial Resources

One of the unique talents of entrepreneurs is


finding the resources to launch a business requires
the understanding of:

Short-term needs, those associated with


activities not part of normal operations
Long-term capital needs, relating to preparation
for future growth.

Section 19.1 Financing the Small Business Start-Up 6


Financing Your Business

Bootstrapping

Most entrepreneurs get bootstrapping


their businesses started by operating a business as
frugally as possible and
bootstrapping. cutting all unnecessary
expenses, such as
borrowing, leasing, and
partnering to acquire
resources

Section 19.1 Financing the Small Business Start-Up 7


Financing Your Business

Bootstrapping

Bootstrapping involves:

hiring as few employees as possible


leasing anything you can
being creative

Section 19.1 Financing the Small Business Start-Up 8


Financing Your Business

Bootstrapping

Bootstrapping factor an agent who


entrepreneurs can also ask handles an
entrepreneurs accounts
suppliers to allow for longer receivable for a fee
payments terms, ask
customers to pay in
advance, or sell their
accounts receivable to a
factor.

Section 19.1 Financing the Small Business Start-Up 9


Financing Your Business

Start-Up Money

The main sources for start-up money for


entrepreneurs include:

friends
family
other resources, such as savings, credit
cards, loans, and investments

Section 19.1 Financing the Small Business Start-Up 10


Financing Your Business

Financing the Start-Up

Some sources of financing include:

banks
finance companies
investment companies
government grants

Section 19.1 Financing the Small Business Start-Up 11


Financing Your Business

Sources of Equity
Financing
To obtain equity capital as equity capital cash
a source of funding for a raised for a business in
exchange for an
business, the owner must ownership stake in the
give equity to obtain the business
financing.
equity an ownership in
a business

Section 19.1 Financing the Small Business Start-Up 12


Financing Your Business

Sources of Equity
Financing
Equity funding is risk capital money
sometimes called risk invested in companies
where there is financial risk
capital.

Section 19.1 Financing the Small Business Start-Up 13


Sources of Equity Financing

Personal Friends and


savings family

State-
sponsored venture Forms of
Private
Equity investors
capital Financing
funds

Venture
Partners
capitalists

Section 19.1 Financing the Small Business Start-Up 14


Financing Your Business

Sources of Equity
Financing
An angel often invests angel a private,
because of his or her belief nonprofessional investor,
such as a friend, a relative,
in a business concept and or a business associate,
the founding team. who funds start-up
companies

Section 19.1 Financing the Small Business Start-Up 15


Financing Your Business

Sources of Equity
Financing
An existing business can venture capital a source
use venture capital of equity financing for
small businesses with
financing to raise large exceptional growth
amounts of money to potential and experienced
achieve its goals. senior management

Section 19.1 Financing the Small Business Start-Up 16


Financing Your Business

Sources of Equity
Financing
Venture capitalists often venture capitalists
provide managerial and individual investors or
investment firms that
technical expertise to small invest venture capital
businesses. professionally

Section 19.1 Financing the Small Business Start-Up 17


Financing Your Business

Sources of Debt Financing

Sources of debt capital are debt capital money


far more numerous than raised by taking out loans,
which must be repaid with
sources of equity capital, interest
but the entrepreneur must
be certain the business can
generate enough cash flow
to repay the loan.

Section 19.1 Financing the Small Business Start-Up 18


Sources of Debt Financing

Banks Trade credit

Small Minority enterprise


business
Sources of
development
investment Debt
programs
companies Financing

Commercial
SBA loans finance
companies

Section 19.1 Financing the Small Business Start-Up 19


Financing Your Business

Sources of Debt Financing

Banks were once the operating capital money


primary source of a business uses to
support its operations in
operating capital, but the short term
today they are much more
conservative in their lending
practices.

Section 19.1 Financing the Small Business Start-Up 20


Financing Your Business

Sources of Debt Financing

An established business line of credit an


can usually get a line of arrangement whereby a
lender agrees to lend
credit from a bank, which it up to a specific amount
can borrow against. of money at a certain
interest rate for a
specific period of time

Section 19.1 Financing the Small Business Start-Up 21


Financing Your Business

Sources of Debt Financing

Some businesses may trade credit credit one


seek trade credit from business grants to
another business for the
other companies in their purchase of goods or
industry as a form of debt services; a source of
financing. short-term financing
provided by one
business within another
businesss industry or
trade

Section 19.1 Financing the Small Business Start-Up 22


Financing Your Business

Financial Planning for


Your Business
Financial planning involves finding the right kind
of financial resources at the right time in the right
amount.

Section 19.1 Financing the Small Business Start-Up 23


Financing Your Business

Financial Planning for


Your Business
Financial planning involves:

Identifying the stages of growth in your


business
Identifying milestones that require resources
Identifying business advisers
Hiring an excellent management team

Section 19.1 Financing the Small Business Start-Up 24


Financing Your Business

19.1

1. Describe the resources available to


entrepreneurs to start their business.

Most entrepreneurs start their businesses by


bootstrapping or using personal resources such
as friends, family, savings, credit cards, loans,
and investments.

Section 19.1 Financing the Small Business Start-Up 25


Financing Your Business

19.1

2. Compare and contrast sources of financing


for start-up ventures.

Entrepreneurs have two options: equity or debt financing. Equity


sources trade cash for some portion of ownership, or equity, in a
business. With debt financing, an entrepreneur borrows money and
repays it with interest, and retains full ownership of the business.
However, the loan must be carried as a liability on the businesss
balance sheet. For this approach to be successful, your business
must generate enough cash flow to repay the loan.

Section 19.1 Financing the Small Business Start-Up 26


Financing Your Business

19.1

3. Describe the importance of financial


planning.

Financial planning provides you with a better


chance of securing the money you need when
you need it in the right amount.

Section 19.1 Financing the Small Business Start-Up 27


Financing Your Business

19.2

Describe the information needed to obtain


financing.
Explain the types of growth financing
available to entrepreneurs.
Describe how to calculate start-up capital
requirements.

Section 19.2 Obtaining Financing and Growth Capital 28


Financing Your Business

19.2

Additional sources of funding become available


when entrepreneurs are ready to grow their
businesses.

Entrepreneurs must calculate their start-up needs


so they can communicate this information to
potential funders.

Section 19.2 Obtaining Financing and Growth Capital 29


Financing Your Business

19.2

pro forma due diligence


character private placement
capacity initial public offering (IPO)
capital stock
collateral working capital
conditions contingency fund

Section 19.2 Obtaining Financing and Growth Capital 30


Financing Your Business

How to Obtain Financing

To obtain financing, you pro forma proposed or


must create pro forma estimated financial
statements based on
financial statements to predictions of how the
include in your business actual operations of the
plan. business will turn out

Section 19.2 Obtaining Financing and Growth Capital 31


Financing Your Business

What Venture Capitalists


Expect
Venture capitalists rarely invest in start-up
companies, but when they do, they expect:

A 30 to 70 percent return on their investment


for start-ups
A 50 percent or more return for an early
stage venture
A business with good management

Section 19.2 Obtaining Financing and Growth Capital 32


Financing Your Business

What Private Investors


Expect
Private investors, or angels, expect:

businesses they understand


investing with like-minded investors
ten times their investment at the end of five
years
a strong management team

Section 19.2 Obtaining Financing and Growth Capital 33


Financing Your Business

What Bankers Expect

Commercial lenders like banks rely on the five Cs


to determine the acceptability of a business loan
applicant:
Character
C
Capacity
C
Capitol
C
Collateral
C
Conditions
C
Section 19.2 Obtaining Financing and Growth Capital 34
Financing Your Business

What Bankers Expect

A bank must believe in character a borrowers


the character of the reputation for fair and
ethical practices,
entrepreneur. including business
experience, dealings with
other businesses, and
reputation in the
community

Section 19.2 Obtaining Financing and Growth Capital 35


Financing Your Business

What Bankers Expect

Banks consider the capacity the ability of a


capacity of a business to business to pay a loan in
view of its income and
pay its debts. obligations

Section 19.2 Obtaining Financing and Growth Capital 36


Financing Your Business

What Bankers Expect

Banks place a strong capital the net worth of


emphasis on whether a a business, the amount
by which its assets
business has a financially exceed its liabilities
stable capital structure.

Section 19.2 Obtaining Financing and Growth Capital 37


Financing Your Business

What Bankers Expect

Banks are more likely to collateral security in the


lend to businesses with form of assets that a
company pledges to a
valuable collateral. lender

Section 19.2 Obtaining Financing and Growth Capital 38


Financing Your Business

What Bankers Expect

Banks consider all the conditions the


conditions in which the circumstances at the time
of the loan request,
business operates. including potential for
growth, amount of
competition, location,
form of ownership, and
insurance

Section 19.2 Obtaining Financing and Growth Capital 39


Financing Your Business

Types of Growth Financing

If your company has established a successful


track record, there are other types of financing
available, including:

venture capital (VC) companies


private placements
initial public offerings (IPOs)

Section 19.2 Obtaining Financing and Growth Capital 40


Financing Your Business

Venture Capital (VC)


Companies
If a VC firm is interested due diligence the
in funding your business investigation and analysis
a prudent investor does
and decides you have a before making business
sound business plan, it decisions
will begin due diligence.

Section 19.2 Obtaining Financing and Growth Capital 41


Financing Your Business

Private Placements

Private placement is a private placement a


way to raise capital by private offering or sale of
securities directly to a
selling ownership interests limited number of
in your private corporation institutional investors who
or partnership. meet certain suitability
standards; ownership
interests are called
securities

Section 19.2 Obtaining Financing and Growth Capital 42


Financing Your Business

Initial Public Offerings


(IPOs)
An initial public offering initial public offering
(IPO) is a popular way to (IPO) the sale of stock in
a company on a public
raise a lot of money for stock exchange
growth since all proceeds
go to the company.

Section 19.2 Obtaining Financing and Growth Capital 43


Financing Your Business

Initial Public Offerings


(IPOs)
The CEO of a company stock a type of security
that has made an IPO is that signifies ownership in
a corporation and
primarily responsible to the represents a claim on part
people who own the of the corporations
company stock. assets and earnings

Section 19.2 Obtaining Financing and Growth Capital 44


Financing Your Business

Initial Public Offerings


(IPOs)
There are five steps to become a public company
with stock for sale on a public exchange.

1. Choose an underwriter or investment banker.


2. Draw up a letter of intent.
3. File a registration statement with the SEC.
4. Announce the offering in the financial press.
5. Do a road show.

Section 19.2 Obtaining Financing and Growth Capital 45


Financing Your Business

Calculating Your Start-Up


Capital Needs
You will need to calculate exactly how much
money you will need to start or grow your
business.

This requires estimating start-up costs, capital


expenditures, working capital (operating costs),
and contingency funds.

Section 19.2 Obtaining Financing and Growth Capital 46


Financing Your Business

Start-Up Costs

Start-up costs are those costs you incur before


you start a business.

Section 19.2 Obtaining Financing and Growth Capital 47


Financing Your Business

Start-Up Costs

Start-up costs may include:

furniture, fixtures, and equipment


promotion expenses and office supplies
fees and licenses

Section 19.2 Obtaining Financing and Growth Capital 48


Financing Your Business

Operating Costs

Operating costs, often working capital the


referred to as working amount of cash needed to
carry out the daily
capital, cover the time operations of a business
between selling your that ensures a positive
product or service and cash flow after covering
all operating expenses
receiving payment from the
customer.

Section 19.2 Obtaining Financing and Growth Capital 49


Financing Your Business

Contingency Funds

Since no one can predict contingency fund an


the future, you should extra amount of money
that is saved and used
include a contingency only when absolutely
fund in your start-up necessary, such as for
calculations. unforeseen business
expenses

Section 19.2 Obtaining Financing and Growth Capital 50


Financing Your Business

19.2

1. Describe the information needed to obtain


financing.

After identifying potential sources of investors, you


need to prepare estimated financial statements
based on predictions of how the actual operations of
a business will turn out. Your financial plan must
include income statements, cash flow statements,
and balance sheets.

Section 19.2 Obtaining Financing and Growth Capital 51


Financing Your Business

19.2

2. Explain the types of growth financing


available to entrepreneurs.

Venture capital (VC) companies are unlikely sources but may


be an option to companies with a proven concept and a huge
growth potential. Private placement is a way to raise capital by
selling ownership interests in a private corporation or
partnership. Initial public offerings (IPOs) are sales of stock in
a company on a public stock exchange.

Section 19.2 Obtaining Financing and Growth Capital 52


Financing Your Business

19.2

3. Describe how to calculate start-up capital


requirements.

Entrepreneurs can figure start-up costs by talking to suppliers,


vendors, manufacturers, distributors, and others in their industry.
Entrepreneurs need to figure capital expenditures, which are
costs to purchase equipment and facilities. Next, entrepreneurs
need to calculate working capital, how much cash is needed to
carry out daily operations. Finally, they must figure contingency
funds, extra money used for unforeseen business expenses.

Section 19.2 Obtaining Financing and Growth Capital 53


Financing Your Business

Technology Enabled
Marketing
Technology enabled marketing (TEM) ties all of a businesss
departments, such as sales, production, and marketing,
together so they can all work from the same pool of data.

Sales force automation and online customer service are


forms of TEM.

Section 19.2 Obtaining Financing and Growth Capital 54


Financing Your Business

Tech Terms
online customer service
the service businesses provide to customers via the Internet

sales force automation


tools that automate the business tasks of sales, such as order
processing, contact management, lead tracking, and inventory control

Section 19.2 Obtaining Financing and Growth Capital 55


End of

Financing Your
Business

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