Techno 11-Sources of Capital
Transcript of Techno 11-Sources of Capital
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Sources
ofCapital
McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11
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Debt or Equity Financing
` Debt financing: obtaining borrowed funds for thecompany.
`Asset-based financing; requires some asset to be usedas a collateral.
` Borrowed funds plus an interest rate need to be paidback.
` Equity financing: obtaining funds for the company inexchange for ownership.
` Does not require collateral.
` Offers investor some form of ownership position.
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Factors Affecting Type of Financing
` Availability of funds.
` Assets of the venture.
` Prevailing interest rates.
` All financing requires some level of equity.`Amount of equity will vary by nature and size of venture.
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Sources for Internal Funds
` Profits.
` Sale of assets and little-used assets.
` Working capital reduction.
` Extended or discounted payment terms suppliers.` Collecting bills (accounts receivable) more quickly.
` Short-term internal source of funds:
` Reducing short-term assets: inventory, cash, and otherworking-capital items.
` Extended payment terms from suppliers.
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External Funds
` Criteria for evaluatingexternal sources of funds:
` Length of time the fundsare available.
` Costs involved.
`Amount of companycontrol lost.
` Sources of funds:
` Self
` Family and friends.
` Commercial banks.` R&D limited
partnerships.
` Government loanprograms.
` Grants.
`Venture capital.
` Private placement.
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Personal Funds
` Least expensive funds in terms of cost and control.
` Absolutely essential in attracting outside funding.
` Typical sources of personal funds:` Savings.
` Life insurance.
` Mortgage on a house or car.
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Family and Friends
` Likely to invest due to relationship with entrepreneur.
`Advantage: easy to obtain money; more patient thanother investors.
` Disadvantage: direct input into operations of venture.
` A formal agreement must be written to include:
`Amount of money involved.
` Terms of the money.
` Rights and responsibilities of the investor.` What happens if the business fails.
` Entrepreneur must consider impact on personalrelationship.
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Commercial Bank Loans
` Bank loans (asset
based): tangible collateral
valued at more than the
amount of money
borrowed.
` Accounts receivable.
` Inventory loans.
` Equipment loans.
` Real-estate loans.
` Cash flow financing:
conventional bank loans;
standard way banks lend
money to companies.
` Installment loans.
` Straight commercial
loans.
` Long-term loans.
` Character loans.
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Lending: Decisions
` Based on quantifiable information and subjective judgments.
` Decisions are made according to the five Cs of lending:
` Character - Owners character
` Capacity- cash flow. The firms ability to meet its regular financial
obligations and to repay the bank loan and that takes cash.` Capital- Lenders expect the business to have an equity base of
investment by the owner/s
` Collateral-any assets the owner pledges to the bank as security forrepayment of the loan.
` Conditions- Interest rates, nations economy, industry growth rate.` Review of past financial statements.
` Evaluation of future projections.
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Lending: Questions
` Does the entrepreneur expect to be carried by the loanfor an extended period of time?
` Is the entrepreneur committed to spend the required
effort to make the business a success?` Does the business have a unique differential advantage
in a growth market?
` What are the downside risks?
` Is there protection against disasters?
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Bank Shopping Procedure
` Complete an application format, which is a minibusiness plan.
` Evaluate alternative banks.
` Select one with a positive loan experience in thebusiness area.
` Set an appointment.
` Carefully present the case for the loan.
` Borrow the maximum amount possible.
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SBA Financing
` An alternative when entrepreneur lack:
` Necessary track record.
`Asset.
` Proceeds from such a loan can be used:
` Working capital.
` Machinery and equipment.
` Furniture and fixtures.` Land and building.
` Leasehold improvements.
` Under some conditions, debt refinancing.
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SBA Conditions
` Repayment ability from cash flow of business.
` Five Cs
` Owners of 20 percent or more are required to
personally guarantee SBA loans.
` Eligibility:
` Size.
` Type of business.
` Use of proceeds.
` And the availability of funds from other sources.
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SBA 7(a) Loan Program
` Maximum loan amount of $2 million.
` SBAs maximum exposure of $1 million.
` Maximum guarantee by the SBA is 50 percent.
` Interest rates are negotiated.` Subject to SBA maximums.
` Pegged to the prime rate.
` Guarantee 85 percent of loans of $150,000 or less.` Guarantee 75 percent of loans above $150,000 to a
maximum of $1 million.
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Other SBA Programs
` 504 loan program:
` Provides fixed-rate financing.
`Acquire machinery, equipment, or even real estate.
`For expansion or modernization.
` Maximum of the program is usually $1 million.
` SBA Microloan 7(m) loan program:
` Short-term loans of up to $35,000.` Working capital, purchase of inventory, supplies,
furniture, fixtures, machinery, or equipment.
` Cannot be used to pay existing debts.
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Research and Development
Limited Partnerships
` Money given to a firm for developing a technology thatinvolves a tax shelter.
` Major elements:
`Contract` Liability for loss incurred is borne by the limited partners.
` Tax advantages to the limited partnership and sponsoringcompany.
` Sponsoring company
` Performs the work on a best-effort basis.
` Acts as a general partner.
` Limited partnership`A party in a partnership agreement that usually supplies money
and has a few responsibilities.
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R&D Limited Partnership: Procedure (1 of 2)
` Funding stage
` Establishment of contract between sponsoring companyand limited partners.
` Investment of money.
` Documentation of terms and conditions of ownership,and scope of the research.
` Development stage
`
Sponsoring company performs actual research.` Technology successfully developed: exit stage
commences.
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R&D Limited Partnership: Procedure (2 of 2)
` Exit stage
` Sponsoring company and the limited partnerscommercially reap the benefits of the effort.
` Three basic types of arrangements for doing this:
` Equity partnerships.
` Royalty partnerships.
` Joint ventures.
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Benefits and Costs
` Benefits:
` Provides funds with minimum amount of equity dilution.
` Reduces the risks involved.
`Strengthens sponsoring companys financial statements.
` Costs
` More expensive to establish than conventional financing.
` Expending of time and money.` Restrictions placed on technology can be substantial.
` Exit from the partnership may be too complex.
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Government (SBIR) Grants
` Phase I
`Awards up to $100,000 for six months.
` Successful projects considered in Phase II.
` Phase II`Awards are up to $750,000 for 24 months.
` Money to be used to develop prototype products orservices.
` Phase III` Does not involve direct funding from the SBIR program.
` Commercialization of technology through private sectoror regular government procurement contracts.
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SBIR Grant: Procedure
` Solicitations describing areas for funding are published.
` Proposal is submitted by a company or individual.
` Screening of received proposals.
` Evaluation of proposal on a technological basis.` Granting of awards based on potential for
commercialization.
` Ownership of research findings is by the company or
individual, not by the government.
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Small Business Technology Transfer (STTR)
` Grant program avalable to entrepreneurs.
` Agencies that participate in the STTR program:
` Department of Defense (DOD).` Department of Energy (DOE).
` Department of Health and Human Services (DHHS).
` National Aeronautics and Space Administration (NASA).
` National Science Foundation (NSF).
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Private Placement
` Funding from private investors, also called angels(family or friends or wealthy individuals).
` Types of investors
`
Investor can influence nature and direction of thebusiness to some extent.
` May be involved in the business operation.
` Entrepreneur needs to consider degree of involvement.
` Private offerings`A formalized method for obtaining funds from private
investors.
` Faster and less costly.
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Regulation D
` Contains:
` Broad provisions designed to simplify private offerings.
` General definitions of what constitutes a private offering
`
Specific operating rules (Rule 504, 505, and 506).` Accredited investors
` Institutional investors.
` Purchasing over $150,000 of issuers securities.
` Net worth of $1 million or more at time of sale.` Incomes in excess of $200,000 in each of the last 2
years.
` Directors, executive officers, and general partners of
issuing company.
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Rules 504, 505, and 506 (1 of 2)
` Rule 504:
` Sale of upto $500,000 of securities to any number ofinvestors in any 12-month period.
` No general advertising/ solicitation through public media.
` Rule 505:
` Sale of $5 million of unregistered securities in the private
offering in any 12-month period.` No general advertising/ solicitation through public media.
`Additional information must be disclosed if issuanceinvolves unaccredited investors.
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Rules 504, 505, and 506 (2 of 2)
` Rule 506:
` Sale of unlimited number of securities to 35 investorsand an unlimited number of accredited investors andrelatives of issuers.
` No general advertising/ solicitation through public media.
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Disadvantages of Outside Capital
` Takes 3 and 6 months to raise/ check on availability.
` Decreases firms drive for sales and profits.
` Availability of capital increases impulse to spend.
` May cause disruption and problems in venture.
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Bootstrap Financing
` Using any possible method for conserving cash.
` Use of discounts for volume.
`
Frequent customer discounts.` Promotional discounts.
`Obsolescence money".
` Savings through bulk packaging.
` Consignment financing.