Joseph Fabiilli | How to Finance Your Business?

1. HOW TO FINANCE YOUR BUSINESS Joseph Fabiilli

2. Today’s Objectives Explore differences among various sources of capital. Identify the cost of operations.

3. Methods of Obtaining Capital Equity Capital Debt Capital 1. 2.

4. Owner Capital  The owner(s) personal contributions to the business  May come from personal savings or personal loans  Small businesses rely heavily on owner capital  Also known as equity capital

5. Retained Earnings  Also a type of equity capital because business profits belong to the owner(s)  Business profits saved for use by the business in the future

6. Debt Capital  Money that others loan to a business  Also known as creditor capital  Banks & other lenders usually will NOT lend to a business unless the equity capital exceeds the debt capital

7. Obtaining Equity Capital Remember those business structures?

8. Sole Proprietorship  Invest more personal funds  Sell personal assets to raise $$$  Mortgage personal property  Assets used as securities are at risk if the business fails.  Other personal assets at risk  Change business structure  Partnership  Corporation

9. Partnership  Partners usually invest personal resources in the business in order to balance/share risk.  If the assets of one partner are not enough to cover business debts, assets from other partners can be taken.  Not mandatory for new partners  Owner gives up individual control over management and decision-making.  A formal partnership agreement identifies the financial contributions of each partner and how profits will be shared.

10. Corporation  Can raise capital quickly because the amount of money invested is much smaller  Stockholders are not involved in day-to-day management of business.  Investors are protected financially.

11. Obtaining Debt Capital

12. Short-Term Debt Capital Must be repaid within a year Often 30-, 60-, or 90-day loans Usually obtained from a bank or other lending institutions

13. Short-Term Debt Capital  Business must supply bank with adequate financial information.  Bank usually obtains a financial report on the business from a credit company.  If the bank considers the business to be a good credit risk, the bank will grant a loan or a line of credit.  Specific amount, set time period  Business owner(s) must sign a promissory note.  Unconditional written promise to pay the lender a certain sum of money at a particular time or on demand

14. Long-Term Debt Capital Money borrowed for longer than a year Usually obtained through: Long-term notes Bonds

15. Term Loans  Also known as long-term notes; medium- or long-term financing used for business operations or for improving fixed assets  Written for periods from 1 to 15 years … or longer  Significant source of capital for most businesses  Banks / lenders require the principal and interest to be repaid on a regular basis over the life of the note.

16. Bonds  Long-term written promise sold by the business to investors that promises payment of a definite sum of money at a specified time  Business receives the amount of the bond when it is initially sold.  Must pay bondholder the borrowed amount (principal) at the bond’s maturity date  Business pays bondholder interest at a specified rate at certain intervals  Bonds do NOT represent a share of ownership; they are investments.  Bondholders are creditors & have priority claim before stockholders.

17. Obtaining Capital 3 things to consider…

18. Cost of Capital  Costly to sell bonds, long-term notes, or issue stock  Must file forms, obtain approval, make agreements, find buyers  Usually only large or highly successful firms even consider stocks/bonds

19. Interest Rates  Rates fluctuate monthly, weekly, even daily  Best to borrow when rates are low (cheaper)  When rates are high, businesses usually borrow short-term debts.

20. Influence of Contributors  Short-term creditors usually have no control over management and operations of business.  Long-term credit agreements are tied to asset claims & may impose limitations on those assets.  Partners / stockholders gain a voice in control of business.

21. Sources of Capital Where do you get the money?

22. Sources of Capital  Banks - most popular source of outside capital  Small Loan Companies - firms that lend money to “higher risk” business and individuals  Venture Capitalists People or companies that lend large sums of money to promising new or growing businesses Usually ask for a percentage of ownership rights in the company Demand a carefully developed business plan that shows high potential for success

23. Sources of Capital  Commercial Credit Companies - lend money on current assets, such as accounts receivable  Sales Finance Companies - used primarily when installment sales are involved  Insurance Companies - portions of funds collected from policy holders may be loaned to firms  Individual Investors / Investment Groups  Pension Funds - retirement funds collected from employees may be loaned to firms

24. Sources of Capital  Investment Banking Organizations Specialize in selling new security issues to the public Helps a business raise large sums of capital through stocks / bonds Can assist a rapidly growing, privately held company with IPO  Equipment Manufacturers Firms that do not lend money, but sell needed equipment on an extended-time payment plan

25. Review! 2 Methods of Obtaining Capital Types of Debt Capital 3 Things to Consider when Obtaining Capital 10 Sources of Capital

26. So how much money do you need? Cost of Product / Service Physical Location Wages & Salaries Equipment Supplies Raw Materials Inventory Rent / mortgage Facility maintenance Utilities Transportation

27. Thank You