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Sources : An Overview



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x uiding factors to financing

x Debt Vs. Equity
x Sources of Debt Finance
x Sources of Equity Finance

O
O
O  



2 
 

x = oosing t e rig t sources of
capital for a business can be
just as important as c oosing
t e rig t form of owners ip
or t e rig t location
x T e money is out t ere; key
is knowing w ere to look
O
O
O  
x Raising money takes time &
effort
x =reativity counts
x T e power of Internet
x T oroug preparation before
approac ing potential
lenders and investors

 
Π  

x Entrepreneurs cannot overestimate t e importance of

making sure t at t e 
 among t emselves,
t eir companies, and t eir funding sources is a good one.

O
O
O  

  



x Fixed
x Working
x rowt =apital

O
O
O  

  
   

x ›
 x Ô

x =apital t at represents t e x T e financing t at a small
personal investment of t e business owner as
owner (or owners) of a borrowed and must repay
company, sometimes called wit interest
risk capital

O
O
O  

  
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2 

x 6ersonal savings
x Friends & family Members
x Angels
x 6artners
x =orporate Venture =apital
x Venture =apital =ompanies

O
O
O  

  

 

x Angels also known as as 6rivate Investors

x Wealt y Individuals, often entrepreneurs t emselves
w o invest in business start-ups in exc ange for equity
stake in companies
x Economic interest and or personal interest /experience
in a particular industry

O
O
O  

  

 
 

x Úarge corporations financing x Inflow of capital
small companies x Tec nical expertise
x Motorola, Qualcomm, Intel, x Distribution c annel
general Electric, U6S, Wal-Mart, x Marketing know- ow
Jo nson & Jo nson
x Introduction to important
x Stage of Business: 6roduct customers & suppliers
Development & Sales growt
x =redibility
x
 (Approx) of t e venture
capital invested comes from large
corporations
O
O
O  
  

 




x 6rivate, non-profit organizations t at assemble pools of

capital and t en use t em to purc ase equity positions in
young businesses t ey believe ave ig growt and
ig -profit potential, producing annual returns of 3-
5 wit in 5-7 years

O
O
O  

  O

 
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x Investment size & screening
x Owners ip & =ontrol
x Stage of Investment
x Investment 6references
x W at Venture =apitalists look for
x =ompetent management
=ompetitive Edge
rowt Industry
Viable Exit Strategy
Intangible factors
O
O
O  
  OO
 |



x =ommercial banks x Non Bank Sources of Debt
S ort term Úoans =apital
=ommercial Úoans Asset based Úenders
(Traditional bank Úoans) Discounting Accounts
Úines of =redit Receivable
Intermediate & Úong term Inventory Financing
Úoans Vendor Financing
Equipment Suppliers
=ommercial Finance
=ompanies

O
O
O  

  O
    !
 

x Smaller commercial banks, commercial finance

companies, allow small businesses to borrow money by
pledging ot erwise idle assets suc as accounts
receivable, inventory, or purc ase orders as collateral
x Manufacturers, w olesalers, distributors and ot er
companies wit significant stock of of inventory or
accounts receivables

O
O
O  

  O
 

 
"  
x A small business pledges its accounts receivable as
collateral; in return, t e lender advances a loan against
t e value of t e approved accounts receivable
x Amount of loan tendered is not equal to t e face value of
t e accounts receivable, t e bank makes an allowance for
t e risk involved because some will be written off as
uncollectible.
x 55-8 of receivables depending on quality
O
O
O  
  O


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x Secured by inventory of raw materials, work in process
and finis ed goods
x If an owner defaults on loan, t e lender can claim t e
pledged inventory, sell it and use t e proceeds to satify
t e loan
x Assumption: T e bank·s claim is superior to t e claims of
ot er creditors
x 5 of t e inventory value
O
O
O  
  O

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x Many Small =ompanies borrow money from t eir vendors

and suppliers in t e form of trade credit
x Trade credit is readily available
x Extending credit in form of delayed payments
x Nature: S ort term, interest free loan for t e amount of
goods purc ased

O
O
O  

  O


2

 

x Equipment vendors encourage business owners to

purc ase t eir equipment by offering to finance t e
purc ase
x Similar to trade credit but wit some different terms
x Reasonable credit
x Modest Down payment
x Balance financed over t e life of t e equipment
O
O
O  
  O
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x Second only to banks

x Willing to tolerate more risk in t eir loan portfolios
x Rely on obtaining a security interest as a collateral given
t e ig er risk loans t at make up t eir portfolio
x Target: =ompanies wit irregular cas flows or t ose t at
are not yet profitable

O
O
O  

  O
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O
O
O  
  O