CH 14- Small Business Finance: Using Equity, Debt, and Gifts

Bootstrapping

- Using one's own capital & funds generated by operating the business to finance start-up & growth - the majority of small business start-ups are funded this way

Boni Fide

- Company's indebtedness to one of the owner's - Expectation of repayment upon exit

Business "facts of life" about bootstrapping

- 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.

Four Cs of Borrowing

1. Character of the managers of the business. 2. Capacity of the business to repay both principal & interest on time. 3. Conditions of the industry & economy in which the business operates. 4. Collateral that can be used to secure the loan.

Three reasons to use outside equity:

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 reenergize it by providing new ideas, procedures, & processes

Gift Capital

Capital resources that neither provide any ownership nor require any repayment to the giver.

Debt Capital

Money borrowed for the purpose of investment in a business

Personal Equity

a person's net worth

During the Start-up Phase of a small business, the emphasis is on:

conserving what little cash the new business has.

Equity Capital

money contributed to the businesses in return for part ownership of the business

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

During the Business Exit Phase of a small business:

the preparation for exiting the business depends, in part, on the nature of the exit that is planned.

During the Operations Phase of a small business, the emphasis is:

to build owner wealth, to conserve assets, to match cash inflows to outflows, and to maximize the return on capital assets by making optimal investing decisions.

During the Growth Phase of a small business, the emphasis is:

to obtain increasing amounts of cash inflows to pay for added inventory, productive assets, and employees needed to meet growing levels of business operations.

Angel Investors

wealthy individuals who seek high returns through private investments

Obtaining outside equity financing can only be done if your business is organized as:

- a partnership - a corporation - a limited liability company

Four stages of financial management in business life

1. Financial Mgmt for Start-up 2. Financial Mgmt for Growth 3. Financial Mgmt for Operations 4. Financial Mgmt for Business Exit