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chapter 8

chapter 8. Obtaining Funding. Lonni Steven Wilson, Medaille College. Key Chapter Objectives. Describe where money comes from. Compare various short-term borrowing strategies. Understand how government-backed borrowing can spur economic growth.

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chapter 8

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  1. chapter8 Obtaining Funding Lonni Steven Wilson, Medaille College

  2. Key Chapter Objectives • Describe where money comes from. • Compare various short-term borrowing strategies. • Understand how government-backed borrowing can spur economic growth. • Understand how to utilize existing resources to leverage a business’ financial position.

  3. Funding Sport Businesses • There is no one correct method to fund a sport business. • Each business requires its own unique blend of financing. • The total number of options and techniques that can be used to obtain funds is all but limitless. • The various funding techniques combine to form the capital structure of a business.

  4. Sources of Funding • Television rights payments • Ticket sales • Sponsorship contracts or similar income-generating techniques • Credit cards • Loans • Venture capitalists • Olympic stamps and coins

  5. Funding a Stadium or Arena A number of options exist to fund a public facility: • Loans • General obligation bonds • Project revenue bonds • Tax revenue bonds • Certificates of participation • Tax incremental financing • Tax exemptions • Tax rebates (Miller, 1998)

  6. Breaks for Sports Facilities • It should be noted that almost every stadium or arena project involves certain government benefits such as tax abatements. • The three proposed facilities in New York (Nets, Mets, and Yankees) are receiving an estimated $1.2 billion in public subsidies, which includes significant tax abatements. • Under existing legislation, new commercial developments in certain New York burroughs do not have to pay property tax for the first 15 years. • The tax is then phased in, so full taxes are not paid until the 26th year of the private facility (deMause, 2005).

  7. Sources of Capital • Equity investors, who purchase a portion of the business in the form of stock (capital gains, dividend payments) • Long-term debt obligations, such as bonds or loans • Short-term loans: suppliers are often the source of these loans (with, e.g., 30 days to pay)

  8. Additional Sources of Capital • Personal resources • Government or bank loans • Self-funding by the business • Relatives and friends • Bank financing • Accounts payable • Commercial paper • Private companies or investor groups

  9. Funding Through Personal Resources Personal financing options • Home equity loan • Credit cards (maintain a good credit rating) (continued)

  10. Funding Through Personal Resources (continued) Recommendations • Set aside at least two years’ worth of living expenses in preparation for starting a new business. • Most new businesses take at least one year to earn enough profit to pay the owner a salary. • Only 20% of new businesses survive.

  11. SBA Loans Small Business Association loans are government backed. One must • have excellent credit, • have no bankruptcies in past 10 years, • have a business plan, • have some type of collateral, and • have up to one-third of the required capital to put into the business.

  12. Borrowing From Friends or Relatives Key tasks • Document the loan with a formal agreement. • Develop a repayment schedule. • Pledge security or collateral. • Keep accurate records of repayment. • Make sure you have proof the business was solvent when the loan was made. • Provide lender with a detailed business plan, including how loan will be repaid.

  13. Borrowing From Others Concerns • Does the lender require ownership interest? • Will the lender demand a say in managerial decisions? • Is there an exit strategy once the business is sound enough to repay the “angel” and regain control? • Will interest payments be tax deductible as a business expense?

  14. Documentation to Secure Funding • Business plan • Pro forma budget • Personnel profiles (of key figures) • Financial statements • Detailed repayment plans • Sometimes even include sample products

  15. The Five Cs of Credit • Character: Assess the applicant’s credit history and truthfulness. • Capacity: Will business become profitable? Will applicant pay back the loan? • Collateral: Real or personal property pledged as security for repaying a loan. • Capital: Equity applicant will chip in. • Condition: Applicant must sell the lender on the value of the business.

  16. Questions for In-Class Discussion • If a friend asked you for a $1,000 loan to start a business, what information would you want to obtain to help you make your decision? • Is there value in “sweat equity,” or the owner’s involvement in a business to help fund a business? • Considering the high failure rate of new businesses, if you had the money, would you loan money to someone else to help start a business if you knew there was a 75% chance that the business would fail? • If you had to develop a strategy to fund building a sports facility based exclusively on borrowing funds, what sources would you pursue? What do you think your chances of success would be? What criteria could help or hurt your chances of obtaining funds?

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