1	Debt and other forms of financing Entrepreneurship Dr. Jeff Shay
2	Debt and other forms of financing There are many alternatives available to individuals who are seeking money to get their new business started or to expand their existing business This module provides some of the examples of financing available Please realize, however, that there are many additional financing opportunities that are available based on your specific needs For this reason, we believe that once you have your plan in place, you should visit with one of our recommended organizations or consultants
3	Bootstrap financing The most basic form of financing is bootstrapping. This generally involves utilizing the resources that are available to the entrepreneur and his or her team. These sources include: Personal savings Credit cards Second mortgages Customer advances Extended terms from vendors
4	Debt financing Debt financing is a financing method involving an interest-bearing instrument, usually a loan, the payment of which is only indirectly related to the sales and profits of the venture. Debt usually requires collateral. Short-term (less than 1 year) and Long-term (more than one year)
5	Equity Financing Equity financing does not require collateral and offers the investor some form of ownership position in the company. Investor shares the profits of the venture.
6	Stages of financing
7	Where do entrepreneurs get their money? The Sources of Funding
8	Types of Bank Loans Many individuals don’t realize that there are a variety of banks loans available: Accounts Receivable loans Inventory Loans Equipment Loans Real Estate Loans
9	Cash from Accounts Receivable Financing Pledging – Accounts Receivable (AR) used as collateral (75-90% of face value of AR) Without notification With notification (paid directly to lender) Overall cost of about 20% on this type of loan Factoring – Accounts Receivable are sold Interest fee (15-30%) Collection fee (6-10%) Credit checking charge (% of invoice or flat rate)
10	Loans against inventory Chattel Mortgage (specific inventory) Floating Lien (all inventory) Field Warehousing (lender separates and guards inventory) Public warehousing (inventory transferred to another location)
11	Equipment Loans Use equipment to secure longer-term financing, usually from 3-10 years Types: New equipment Used equipment Sale leaseback Lease financing
12	Real Estate Loans Used to obtain a company’s land, plant, or other building Usually up to 75% can be financed
13	Cash Flow Financing Called Conventional Bank Loans Types: Lines of credit Installment loans Straight commercial loans Long-term loans Character loans
14	Lines of credit Similar to a credit card Maximum line is established Pay interest on the portion that you have used Commitment fee paid up front to ensure that the money will be available
15	Installment Loans Helps to have a track record of sales and profits Short-term funds frequently used to cover working capital needs Usually 30 to 40 days
16	Straight Commercial Loans Hybrid of the Installment Loan Funds are advanced to the firm for 30-90 days Frequently used for seasonal businesses and to building up inventory
17	Long-term Loans Usually available to strong, mature companies Can make available for up to 10 years Fixed interest and principal schedule
18	Character Loans When the business itself does not have the assets to support a loan, the entrepreneur may need a loan based on her/his own personal financial position Usually require pledging personal assets
19	What bankers look for… Character Capacity Capital Collateral Conditions
20	Small Business Administration Small Business Administration Guaranty Loan SBA guarantees that 80% of the amount loaned to the entrepreneur will be repaid if the company cannot make payment Allows banks to make higher risk loans Some banks specialize in these loans Both long- and short-term loans are guaranteed 15 year maximum on existing land and buildings, 20 years on new buildings 10 year maximum on equipment, inventory, etc. Special reporting requirements exist on these loans
21	Research and Development Limited Partnerships Available in high-technology areas Investments from individuals looking for tax shelters Particularly suited for high risk, high research ventures Allows R&D costs to be expensed rather than capitalized as final cost of product
22	Government Grants Small Business Innovation Development Act For launching innovative ideas Phase 1 – 6 months, $50K Phase 2 – 24 months, $500K Phase 3 – from other sources Federal agencies participating: DOD, NASA, DOE, HHS, NSF, USDA, DOT, EPA, etc.
23	Private Placement Investors take an equity position and can influence the nature and direction of the business Different from Public Offering – i.e., don’t have to register with the SEC Preference is for accredited investors
24	Initial Public Offering Steps Choose an investment banker Draw up a letter of intent/terms and conditions File a registration statement with the SEC (a red herring) Publish the tombstone Decide on a stock exchange Go on a road show prior to the IPO
25	Working Capital as a source of financing Some small businesses don’t realize that they could access additional funding if they were able to adjust their policies on accounts receivable and accounts payable These could significantly change your working capital What is working capital? ….
26	Working Capital Current assets Current liabilities Working Capital
27	Managing Working Capital as a source of financing So, how could you use this as a source of financing? Reduce Accounts Receive or Accounts Receivable Cycle Increase Accounts Payable or Accounts Payable Cycle Or, even better, do both This would significantly increase the amount of cash your business has on hand
28	Summary This module has introduced you to a wide spectrum of sources for financing Hopefully this has brought to your attention additional ways in which you might be able to finance your business As we suggested at the beginning of the module, however, we recommend that once you have explored the possibilities you should sit down with an experienced professional
29	Next Module In the next module we’ll explore the legal and tax issues associate with starting a new business or managing a small business