Ch. 13 Sources of Financing: Equity and Debt
Ch. 13 Sources of Financing: Equity and Debt MGMT 3850
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This 6 page Class Notes was uploaded by Alora Lornklang on Sunday May 1, 2016. The Class Notes belongs to MGMT 3850 at University of North Texas taught by Brandi Everett in Spring 2016. Since its upload, it has received 38 views. For similar materials see Foundations of Entrepreneurship in Entrepreneurship at University of North Texas.
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Date Created: 05/01/16
MGMT 3850 Foundations of Entrepreneurship Chapter 13 Sources of Financing: Equity and Debt 1. Describe the differences between equity capital and debt capital Capital is any form of wealth employed to produce more wealth. Entrepreneurs have access to two different types of capital: o Equity financing represents the personal investment of the owner (or owners), and it offers the advantage of not having to be repaid with interest o Debt capital is the financing a small business owner has borrowed and must repay with interest. It does not require entrepreneurs to give ownership in their companies. 2. Discuss the various sources of equity capital available to entrepreneurs The most common source of financing a business is the owner’s personal savings. After emptying their own pockets, the next place entrepreneurs turn for capital is family members and friends. Crowdfunding taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on crowdfunding Web sites and raise money to fund their ventures from ordinary people who invest as little as $100. Angels are private investors who not only invest their money in small companies but also offer valuable advice and counsel to them. Some business owners have success financing their companies by taking on limited partners as investors or by forming an alliance with a corporation, often a customer or a supplier. Venture capital companies are forprofit, professional investors looking for fast growing companies in “hot” industries. When screening prospects, venture capital firms look for competent management, a competitive edge, a growth industry, and important intangibles that will make a business successful. Some owners choose to attract capital by taking their companies public, which requires registering the public offering with the SEC. 3. Describe the process of “going public.” Going public involves o Choosing the underwriter o Negotiating a letter of intent o Preparing registration statement o Filing with the SEC, and o Meeting state requirements 4. Describe the various sources of debt capital. Commercial banks offer the greatest variety of loans, although they are conservative lenders. Typical shortterm bank loans include commercial loans, lines of credit, discounting accounts receivable, inventory financing, and floor planning Trade credit is used extensively by small businesses as a source of financing. Vendors and suppliers commonly finance sales to businesses for 30, 60, or even 90 days. Equipment suppliers offer small businesses financing similar to trade credit but with slightly different terms. Commercial finance companies offer many of the same types of loans that banks do, but they are more risk oriented in their lending practices. They emphasize accountsreceivable financing and inventory loans. Savingsandloan associations specialize in loans to purchase real property— commercial and industrial mortgages—for up to 30 years. Stockbrokerage houses offer loans to prospective entrepreneurs at lower interest rates than banks because they have highquality, liquid collateral—stocks and bonds in the borrower’s portfolio. Small Business Investment Companies are privately owned companies licensed and regulated by the SBA that qualify for SBA loans to be invested in or loaned to small businesses. Small Business Lending Companies make only intermediate and longterm loans that are guaranteed by the SBA 5. Describe the various loan programs available from the Small Business Administration Almost all SBA loan activity is in the form of loan guarantees rather than direct loans. Popular SBA programs include: o The SBA Express program o The Patriot Express Program o The 7(a) loan guaranty program, o The Section 504 Certified Development Company program o The Microloan program o The CAPLine program o The Export Working Capital program o The Disaster Loan program 6. Identify the various federal and state loan programs aimed at small businesses. The Economic Development Administration, a branch of the Commerce Department, makes loan guarantees to create and expand small businesses in economically depressed areas. The Department of Housing and Urban Development extends grants to cities that, in turn, lend and grant money to small businesses in an attempt to strengthen the local economy. The Department of Agriculture’s Rural Business Cooperative Service loan program is designed to create nonfarm employment opportunities in rural areas through loans and loan guarantees. The Small Business Innovation Research Program involves 11 federal agencies that award cash grants or longterm contracts to small companies wanting to initiate or to expand their R&D efforts. The Small Business Technology Transfer Program allows researchers at universities, federally funded R&D centers, and nonprofit research institutions to join forces with small businesses and develop and commercially promising ideas Many state and local loan and development programs, such as capital access programs, revolving loan funds, and community development financial institutions, complement those sponsored by federal agencies. 7. Explain other methods of financing a business. Business owners can get the capital they need by factoring accounts receivable, leasing equipment instead of buying it, borrowing against their retirement accounts, borrowing against future credit card sales, borrowing from peers, using a loan broker, or even using credit cards. Vocabulary Layered financing o The technique of raising capital from multiple sources Capital o Any form of wealth employed to produce more wealth Equity capital o Capital that represents the personal investment of the owner of a company, sometimes called risk capital Debt capital o The financing that an entrepreneur borrows and must repay with interest Bootstrapping o A process in which entrepreneurs tap their personal savings and use creative, lowcost start up methods to launch their businesses. Accredited investors o Investors who have a sustained net worth of at least $1 million or annual income of at least $200,000 Crowdfunding o A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100. Accelerator programs o Programs, often sponsored by communities and universities, that provide a small amount of seed capital and a wealth of additional support for start up companies Private investors (angels) o Wealthy individuals, often entrepreneurs themselves, who invest in business startups in exchange for equity stakes in the companies. Venture capital companies o Private, forprofit organizations that purchase equity positions in young businesses that they believe have highgrowth and highprofit potential Initial public offering (IPO) o A method of raising equity capital in which a company sells shares of its stock to the general public for the first time. Managing underwriter (investment banker) o A financial company that serves two important roles: Helping to prepare the registration statement for an issue Promoting the company’s stock to potential investors Letter of intent o An agreement between the underwriter and the company about to go public that outlines the details of the deal. Registration statement o The document a company must file with the SEC that describes both the company and its stock offering and discloses information about the risk of investing Road show o A gathering of potential syndicate members sponsored by the managing underwriter for the purpose of promoting a company’s IPO Prime rate o The interest rate that banks charge their most creditworthy customers Line of credit o A shortterm bank loan with a preset limit that provides working capital for daytoday operations. 7(a) loan guaranty program o An SBA program in which loans made by private lenders to small businesses are guaranteed up to a ceiling by the SBA Certified Development company (CDC o A nonprofit organization licensed by the SBA and designed to promote growth in local communities by working with commercial banks and the SBA to make longterm loans to small businesses. Microloans o Loans made through an SBA program aimed at entrepreneurs who can borrow amounts of money as small as $100 up to a maximum of $50,000 CAPLine Program o An SBA program that makes shortterm capital loans to growing companies seeking to finance seasonal buildups in inventory or accounts receivable Export Express Program o An SBA loan program that offers quick turnaround times to small companies that are developing or expanding their export initiatives Export Working Capital (EWC) Program o An SBA loan program that is designed to provide working capital to small exporters International Trade Program o An SBA loan program for small businesses that are engaging in international trade or are adversely affected by competition from imports Disaster loans o An SBA loan program that makes loans to small businesses devastated by some kind of financial or physical loss. Advance rate o The percentage of an asset’s value that a lender will lend Margin loans o Loans from a stockbroker that uses the stocks and bonds in the borrower’s portfolio as collateral Margin (maintenance) call o Occurs when the value of a borrower’s portfolio drops and the broker calls the loan in, requiring the borrower to put up more cash and securities as collateral Credit unions o A nonprofit financial cooperative that promotes saving and provides loans to its members Small Business Investment Companies (SBICs) o Privately owned financial institutions that are licensed by the SBA and use a combination of private capital and federally guaranteed debt to provide longterm venture capital to small businesses Capital Access Programs (CAPs) o A state lending program that encourages lending institutions to make loans to businesses that do not qualify for traditional financing because of their higher risk Revolving loan funds o A program offered by communities that combine private and public funds to make loans to small businesses, often at belowmarket interest rates. Community development financial institutions (CDFIs) o Communitybased financial institutions that designate at least a portion of their loan portfolios to otherwise “unbankable” business owners and aspiring entrepreneurs Factor o A financial institution that buys business’s accounts receivable at a discount Rollovers as Business Startups (ROBS) o A method of financing that allows entrepreneurs to use their retirement savings to fund their business startups Merchant cash advance o A method of financing in which a provider prepurchases credit and debit card receivables at a discount Peertopeer loans o Webbased platforms that create an online community of lenders who provide funding to creditworthy small businesses Loan brokers o Businesses that specialize in helping small companies find loans by tapping into a wide network of lenders.
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