BUSMHR 2500 Chapter 11 From the Business Plan to Funding the Venture

Research and Development Limited Partnership

- partnership arrangement is established between sponsoring company developing technology with funds provided by limited partnership. - three components include contract, sponsoring company, and limited partnership

Family and Friends as source of capital

- provide a small amount of equity funding to new ventures. - easy to obtain money, but the amount is very small - if money is informed of equity funding, a family member or friend has an ownership position in the venture. - They are not problem investors and are patient than other investors in desiring a return on investment.

- availability of funds, assets of venture, and interest rates

What are some key factors in choosing debt or equity financing?

Accounts Receivable Loans

- Provides a good basis for a loan, especially if customer base is creditworthy. - Banks may finance up to 80 percent of value of accounts receivable for creditworthy customers.

Angels

- Private investors that can be friends, family, or wealthy individuals. - Takes equity position and can influence the nature of business to an extent.

Equity Financing

- Doesn't require collateral but offers investors some form of an ownership position in the venture. - Investor shares in profits of the venture.

Equipment Loans

- Equipment can secure longer-term financing on a 3 to 5-year basis. - Equipment financing can fall into any of the following several categories: financing purchase of new equipment, used equipment, sale-leaseback financing, or lease financing.

Small Business Innovation Research (SBIR)

- Grant program requires all federal agencies to share portion of R&D funds with small businesses. - Provides a uniform method of soliciting, evaluating, and selecting research proposals.

Debt Financing

- Involves an interest-bearing instrument with payment only indirectly related to sales or profit. - Short-term money used to provide working capital. - Long-term debt (lasting > 1 year) is frequently used to purchase some asset, with part of the value used as collateral. - Additionally, the investor must pay back the number of funds burrowed plus a fee, expressed in terms of an interest rate.

Personal Funds

- Least expensive in terms of cost and control. - Essential in attracting outside funding. - AKA blood equity. Typical sources of personal funds and includes savings, life insurance, or mortgage or a house or car.

Internally Generated Funds

- Most frequently employed type of funds. - Come from sources within company - Should be on rental, not ownership basis.

Commercial Banks

- Most frequently used source of short-term funds when collateral is available. Collateral can be business assets, personal assets, or assets of cosigner of note. - Bank lending decisions can be summarized by five C's character, capacity, capital, collateral, and conditions.

External Financing

- Obtained from sources outside venture. - In terms of cost and control, personal funds are least expensive. - Family and friends can provide a small amount of equity funding.

Inventory Loans

- Often basis for loan, particularly when liquid and easily sold. - Finished goods can be financed up to 50% of value.

Small Business Administration (SBA)

- Primarily a guarantor of loans made by private and other institutions.

Development Stage

A company performs actual research, using funds from limited partners.

Funding stage

A contract is established between sponsoring company and limited partners and money invested for proposed R&D effort.

Exit Stage

Both parties reap the commercial benefits.