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