Chapter 19 Financing Your Business

1. Chapter 19 Financing Your Business Business Management Mrs. Deady

2. Objectives • Describe the resources available to entrepreneurs to start their business • Compare and contrast sources of financing for start-up ventures • Describe the importance of financial planning • Describe the information needed to obtain financing • Explain the types of growth financing available to entrepreneurs • Describe how to calculate start-up capital requirements

3. Definitions 19.1: Financing the Small Business Start-Up • Bootstrapping – operating as frugally as possible and cutting unnecessary expenses • Factor – an agent who handles an entrepreneur’s accounts receivable for a fee • Equity Capital – cash raised for a business in exchange for an ownership stake in the business • Equity – ownership in a business (equity funding is called risk capital) • Risk Capital – money invested in companies where there is financial risk • Angel – private investor who funds start-up companies; nonprofessional finance sources

4. Definitions 19.1: Financing the Small Business Start-Up, cont’d • Venture Capital – source of equity financing for small businesses with exceptional growth potential and experienced senior management • Venture Capitalists – professional individual investors or investment firms • Debt Capital – money raised by taking out loans • Operating Capital – money used to support the business in the short term • Line of Credit – lender agrees to lend up to a certain amount at a specific interest rate for a period of time • Trade Credit – credit granted to another business for the purchase of goods or services in the short term

5. 3 Methods of Bootstrapping • Hiring as few employees as possible • Leasing anything you can • Being creative

6. Sources of Equity Financing • Personal savings • Friends and family • Private investors • Partners • Venture Capitalists • State-sponsored venture capital funds

7. Sources of Debt Financing • Banks • Trade credit • Minority enterprise development programs • Commercial finance companies • SBA loan • Small Business Investment Companies (SBICs)

8. Definitions 19.2: Obtaining Financing and Growth Capital • Pro forma –proposed or estimated financial statements based on predictions of how the business will turn out • Character – borrower’s reputation for fair and ethical business • Capacity – ability of business to pay a loan – having sufficient cash flow given operating expenses • Capital – net worth of a business; amount assets exceed liabilities • Collateral – security if the form of assets that a company pledges to a lender • Conditions – circumstances at the time of the loan request

9. Definitions 19.2: Obtaining Financing and Growth Capital, cont’d • Due diligence – investigation and analysis an investor does before making business decisions • Private placement – private offering or sale of securities directly to a limited number of investors. • IPO (Initial Public Offering) – sale of stock in a company on a public stock exchange • Stock – type of security that signifies ownership in a corporation and a claim on its assets • Working Capital – amount of cash needed to carry out the daily business operations • Contingency Fund – extra amount of money saved and used only when absolutely necessary

10. Private Investors - Angels • What do they look for in a new venture? A strong management team • How much of a return do they expect? ten times their investment at the end of 5 years

11. What Bankers Look for in a Loan Applicant • Character • Capacity • Capital • Collateral • Conditions

12. Taking a Company Public and Issuing Stock: • Choose an underwriter or investment banker • Draw up a letter of intent • File a registration statement with the SEC • Announce the offering in the financial press • Do a road show to market the offering to all major institutional investors