Chapter 11: Source of Capital

SBA Microloan

provides short term loans for up to 50,000 to small businesses for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment

Real Estate Loans

real estate if frequently used in asset-based financing - up to 75% of the value

Bootstrapping Financing

the concept of doing everything possible to avoid having to tap into external capital - abstaining and conserving cash

Commercial Banks

the source of short-term funds for the entrepreneur when collateral is available

Straight Commercial Loans

this loans is a hybrid of the installment and straight commercial loan, by which funds are advanced to the company for 30 to 90 days

Long Term Loans

when a longer time period for use of the money is required, long term loans are used

Character Loans

when the business itself does not have the assets to support a loan, the entrepreneur may need a character (personal) loan

SBA Small Business Financing

when the entrepreneur is unable to secure a regular commercial bank loan, and alternative is a guaranty loan from the government - SBA Microloan

Funding Sources

- self/personal funds - family and friends - commercial banks -cash flow financing - bank lending decisions - SBA small business financing - research and development limited partnerships - government grants - private financing - boot strapping financing

Requirements of Debt Financing

- some assets be used as collateral (a car, house, inventory, etc.) - entrepreneur pays back the money of funds borrowed as well as a fee usually expressed in terms of the interest rate

Bank Lending Decisions

banks are risk averse and very conservative in lending money, particularly to new ventures, not wanting to incur bad loans

Installment Loans

can also be obtained by a venture with a track record of sales and profits

Equity Financing

does not require collateral and offers the providers some form of ownership position in the venture

Equipment Loans

equipment can be used to secure long-term financing, usually up to a 3 to 5 year basis - 50% to 80% of the value of the equipment can be financed depending on its salability

Government Grants

federal and state provide training grants to companies particular to those companies located in and/or hiring in what has been determined to be a labor surplus area

Debt Financing

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 - short term debt - long term debt

Long Term Debt

frequently used to purchase assets such as a piece of machinery, land or a building with part of the value of the asset being used as collateral for the long term loan

Inventory Loans

inventory is another of the firm's assets that can often be the base for a loan and particularly when the inventory is more liquid and can be easily sold - can be financed up to 50% of its value

Short Term Debt

money is usually used to provide working capital to finance such things as inventory, accounts receivable or other items needed for the operation of the business

Family and Friends

most likely to invest due to their relationship with the entrepreneur - provide smaller amounts of equity funding for the new venture - keep the business arrangement strictly business - all the details of the financing should be agreed-upon before the money is put into the venture

Self/Personal Funds

often referred to as blood equity, the typical sources of personal funds includes savings, life insurance, or mortgage on a house or care

Cash Flow Financing

other types of debt financing frequently provided by commercial banks and other financial institutions

Line of Credit Financing

perhaps the form of cash or financing most frequently used by entrepreneurs

Account Receivable Loans

provide a good basis for a loan, especially if the customer is well known and credit worthy - a bank may finance up to 80% of the value of their accounts receivable

Types of Bank Loans

- accounts receivable - inventory - equipment - real estate

Types of Cash Flow Financing

- line of credit financing - installment loans - straight commercial loans - long term loans - character loans

Private Financing

angel investors that are a source of funds for an entrepreneur

Research and Development Limited Partnerships

another source of duns for entrepreneurs in high technology areas