Entrepreneurship Chapter 14

minimize overhead costs

-Cloud computing -Virtual storefronts -Business incubators -Business office co-ops -Co-working spaces

Crowdfunding for Equity

-Document your business -Make a business plan -Create a compelling story -Create a professional-looking video -Develop a list of potential investors

Reasons Bootstrapping is so common

-External equity capital is not available for most small business start-ups. -Banks do not loan to start-up businesses. -Owners often do not want to share ownership. -Owners usually want to be their own bosses. -Owners typically do not want to be responsible to others for losses of the business.

Sources of Financing for Small Businesses

-The number one source is from the owners (or potential owners) themselves. -The other major sources include family and friends, credit cards, trade credit, banks, and other commercial lenders.

Four Cs of Borrowing

1.Character of the managers of the business. 2.Capacity of the business to repay both principal and interest on time. 3.Conditions of the industry and economy in which the business operates. Collateral that can be used to secure the loan.

Getting a Loan for your Business

1.Direct loans of cash 2.Guaranteeing loans made by commercial banks 3.Reducing taxes by allowing interest to be deducted

Customer Funding of you Business

1.Matchmaker models (like Airbnb) 2.Pay-in-advance models (like Threadless.com) 3.Subscription models (like Netflix) 4.Scarcity-based models (like Groupon or Gilt) Service-to-product models22 (like BaseCamp or SaaS like Office 365)

When giving a gift

1.Put your agreement into writing 2.If it is a gift, have the agreement specifically say so. 3.If it is a loan, have the agreement specify the exact interest and payment terms. 4.If it is an equity investment, consider nonvoting stock.

Tools for Financial Management

1.With your planned position and results (your master budget) 2.With prior years' position and results, 3.With the position and results of other firms.

Why use Equity Capital?

1.You will reduce your own exposure to financial loss 2.Your business will not have increased costs in the form of interest 3.Bringing outside investors into an existing business can often re energize it by providing new ideas, procedures, and processes

Credit Reporting Agency

9A business that collects, collates, and reports information concerning an entity's use of debt.

Interest

9A charge for the use of money, usually figured as a percentage of the principal.

Corporation

9A legal "artificial" entity that is formed by filing specific documents with a state government.

Limited Liability Company (LLC)

9A legal form of business organization that is created by filing required documentation with a state government. 9Have a choice, under federal tax law, of being taxed as either corporations or partnerships.

Tax Abatement

9A legal reduction in taxes by a government.

Financial Leverage

9A measure of the amount of debt relative to total investment.

Angel Investor

9A wealthy individual who invests in companies in relatively early stages of development.

Foundation

9An institution to which private wealth is contributed and from which private wealth is distributed for public purposes.

Community Development Organization

9An organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area.

Accelerator

9An organization that supports startup technology businesses by providing inexpensive office space, a variety of support services, and resources 9Most are associated with universities.

Tax Credits

9Direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria.

Word of Mouth

9Discounts, Local signage, Facebook, Cooperative advertising

Grants

9Gifts of money made to a business for a specific purpose.

Secured Debt

9Loans that provide the lender with the legal right to seize specific assets in the event of nonpayment. Most automobile loans are secured debt and if you don't make your payments, your car will be repossessed.

Outside Equity

9Money from selling part of your business to people who are not and will not be involved in the management of the business.

Dividends

9Payments of profits to the owners of corporations.

Publicity

9Press releases, Public speaking, Donate your product or service

Small Business Investment Companies

9Private businesses that are authorized to make SBA insured loans to start-ups and small businesses.

Microlender

9SBA-approved partners who offer SBA-guaranteed microloans to eligible small businesses Require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000.

Collateral

9Something of value given or pledged as security for payment of a loan 9May consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings.

Weighted Average Cost of Capital (WACC

9The expected average future cost of funds.

Risk

9The level of probability that an investment will not produce expected gains.

Gain on Investment

9The percentage amount that the payout of an investment differs from original cost 9Calculated as (payout − investment + dividends)/ investment.

Cost of Capital

9The percentage cost of obtaining future funds.

Optimum Capital Structure

9The ratio of debt to equity that provides the maximum level of profits.

Diversify

9To invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk.

Partnership

9Two or more people cooperating to conduct a business enterprise.

Fair Credit Reporting Act

9U.S. federal legislation specifying consumers' rights vis à vis credit reporting agencies.

SaaS

9refers to an Internet based program that you would use in work or leisure. 9paid for by time frame, project, or some measure of usage. stands for Software as a Service

Debt

A legal obligation to pay money in the future.

Unsecured Debt

Loans that do not allow a lender to seize specific assets in the event of nonpayment.

Debt Capital

Money borrowed for the purpose of investment in a business.

Equity Capital

Money contributed to the businesses in return for part ownership of the business.

Bootstrapping

Using low-cost or free techniques to minimize your cost of doing business.

Gift

Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest.

Contractors

exist to complete tasks that have a clear beginning, middle, and end.

Overtime

is usually much less expensive than hiring more full-time workers during times of increased business.

Student Interns

often provide high talent and strong motivation at a low cost to you.

Subcontract

parts of your business that are not your core competency

Rent Space

that is unused or underutilized by other ongoing businesses

Outsource

the production of your service or product