Chapter 15

Sources of Financing for Typical Start-up Businesses

- Personal/Family saving of owners -- 63.9% - Banks -- 17.9 - Credit cards -- 10.3 % - Friends and family -- 5%

Merchant cash advance

-A provider pre-purchases credit and debit card receivables at a discount.

Section 504 Certified Development Company Program

-Designed to encourage small businesses to purchase fixed assets, expand their facilities, and create jobs.

Leasing:

-Lease assets rather than buying them to avoid tying up capital.

Commercial banks Sources of Debt Capital

-Lenders of first resort for small businesses -Average micro-business loan = $12,455 -Average small business loan = $342,500

Layered financing

-Piecing together capital from multiple sources

Equity capital:

-Represents the personal investment of the owner(s) in the business. -Called risk capital because investors assume the risk of losing their money if the business fails. -Does not have to be repaid with interest like a loan does. -But, the entrepreneur must give up some ownership in the company to outside investors.

Loan brokers

-Specialize in helping small companies find loans by tapping into a wide network of lenders.

Advance rate

-The percentage of an asset's value that a lender will lend

Peer-to-peer lending

-Web-based platforms that create an online community of lenders who provide funding to creditworthy small businesses.

Debt capital

-repaid with interest -carried as a liability on the company's balance sheet .-Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous. -Can be expensive, especially for small companies, because of the risk/return tradeoff.

The "Secrets" to Successful Financing

1. Choosing the right sources of capital ;choosing the right form of ownership or the right location. 2. The money is out there; the key is knowing where to look. 3. Raising money takes time and effort. 4. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas. 5. The Internet puts at entrepreneur's fingertips vast resources of information that can lead to financing. 6. Put social media to work to locate potential investors. 7. Be thoroughly prepared before approaching lenders and investors. 8. Entrepreneurs cannot overestimate the importance of making sure that the "chemistry" among themselves, their companies, and their funding source is a good one. 9. Plan an exit strategy. 10. When capital gets tight remember to bootstrap.

Capital

:-Any form of wealth employed to produce more wealth. -Two types: --Equity --Debt

6. Venture Capital Companies

:-Private, for-profit companies that purchase equity positions in young businesses that they believe have high-growth and high-profit potential. -More than 400 operate across the United States -Most venture capitalists seek investments in the $5 million to $25 million range -Target companies with high-growth and high-profit potential .-Business plans are subjected to an extremely rigorous review - less than 1% accepted. •Most often, venture capitalists invest in a company across several stages. •On average, 96-98% of venture capital goes to: -Early stage investments (companies in the early stages of development) .-Expansion stage investments (companies in the rapid growth phase). •Only about 2% of venture capital goes to businesses in the startup or seed phase.

Factoring Accounts Receivable

:-Selling accounts receivable outright to a factor.

4. Accelerators

Accelerator programs:-Provide a small amount of seed capital and a wealth of additional support for start-up companies. -Offer a structured program that lasts from three months to one year. -The most important contribution is the coaching and mentoring received. -Examples: AngelPad and Techstars

Nonbank Sources of Debt Capital

•Asset-based lenders •Vendor financing (trade credit) •Equipment suppliers •Commercial finance companies •Saving and loan associations Stockbrokers -Margin loans -Margin calls •Credit unions •Private placements •Small Business Investment Companies (SBIC

Asset Based Lenders

•Businesses can borrow money by pledging as collateral otherwise idle assets - accounts receivable, inventory, and others. •Advance rate .•Discounting accounts receivable•Inventory financing •Purchase order financing

Steps to Take a Company Public

•Choose the underwriter •Negotiate a letter of intent •Prepare the registration statement •File with the SEC •Wait to "go effective" •Road show •Sign underwriting agreement •Meet all state requirements

What Do Venture Capital Companies Look For?

•Competent management •Competitive edge •Growth industry •Viable exit strategy •Intangibles factors

8. Going Public

•Initial public offering (IPO): -When a company raises capital by selling shares of its stock to the public for the first time. •Since 2001, the average number of companies making IPOs each year is 108. •Few companies with less than $25 million in annual sales make IPOs.

Registration D goal

•Regulation D-Goal: To give small companies easy access to capital markets with simplified registration requirements.

Microloan:

-A loan made through an SBA program aimed at entrepreneurs who can borrow amounts of money as small as $100 and up to a maximum of $50,000.

Rollovers as Business Startups (ROBS)

-Allows entrepreneurs to use their retirement savings to fund their business start-ups.

•7(A) Loan Guaranty Program:

-An SBA program in which loans made by private lenders to small businesses are guaranteed up to a ceiling by the SBA.

Small Business Financing Strategies most used and percentages

-Bank or credit union loan --49% - Credit Cards -- 32% - Earnings from the business -- 30%

Loans involving international trade

-Export Express Program -Export Working Capital Program -International Trade Program

Sources of capital include:

-Family and Friends -Angel Investors -Initial Public Offering -Traditional Bank Loan-Asset-based Borrowing -Federal, SBA Loans, and others

3. Crowd Funding

-Taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100. -The returns for investment are tokens - discount coupons and free samples .-Jumpstart Our Business Startups (JOBS) Act expands the use of crowd funding.

Sources of Debt Capital from Commercial Banks•

Short-term loans -Home Equity Loans -Commercial Loans -Lines of Credit -Floor planning •Immediate and Long-Term Loans -Installment Loans -Term Loans

1. Personal Savings

The first place an entrepreneur should look for money. -Bootstrapping •The most common source of equity capital for starting a business. •Outside investors and lenders expect entrepreneurs to put some of their own capital into the business before investing theirs.

7. Corporate Venture Capital

•About 300 large corporations across the globe invest in start-up companies. •More than 13.4% of all VC deals involve corporate venture capital. •Capital infusions are just one benefit; corporate partners may share marketing and technical expertise.

2. Friends and Family Members

•After emptying their own pockets, entrepreneurs should turn to those most likely to invest in the business: friends and family members. •Be careful! Inherent dangers lurk in family/friendly business deals, especially those that flop.

Characteristics of Successful IPO Candidates

•Consistently high growth rates •Scalability •Strong record of earnings •3 to 5 years of audited financial statements that meet or exceed SEC standards •Solid position in a rapidly -growing industry: -Average company age is 9.7 years •Sound management team with experience and a strong board of directors

The Nature of Debt Financing

•Debt financing is a popular tool used by entrepreneurs to acquire capital .•Borrowed capital allows entrepreneurs to maintain complete ownership of their businesses, but must be repaid with interest. •Small businesses are considered more risky than corporate customers. -Prime rate

Federally Sponsored Programs

•Economic Development Administration (EDA) •Department of Housing and Urban Development (HUD) •U.S. Department of Agriculture's Rural Business (USDA) - Cooperative Service •Small Business Innovation Research (SBIR) •Small Business Technology Transfer programs (STTR) •State and Local Loan Development Programs -Capital Access Programs (CAPs) -Revolving loan funds -Community development financial institutions

Family and Friendship Financing

•Family should not be your first financing option. •Choose your financier carefully.•Keep the arrangement "strictly business." •Prepare a business plan. •Settle the details up front.•Create a written contract .•Treat the money as "bridge financing." •Develop a payment schedule that suits both parties. •Have an exit plan.

Sources of Equity Financing

•Personal savings •Friends and family members •Crowd funding •Accelerators •Angels •Venture capital companies •Corporate venture capital •Public stock sale

Raising Capital

•Raising capital to launch or expand a business is a challenge. •Many entrepreneurs are caught in a "credit crunch." •Financing needs in the $100,000 to $3 million range may be the most challenging to fill.

SBA Loan Guarantee Programs

•The SBA guarantees more than 95,000 small business loans totaling more than $33 billion each year .-Aimed at entrepreneurs who can't get conventional funding. -Average duration of an SBA loan is 12 years.

5. Angels

•Wealthy individuals who invest in emerging entrepreneurial companies in exchange for equity (ownership) stakes .•An excellent source of "patient money" for investors needing relatively small amounts of capital typically ranging from $100,000 (sometimes less) to as much as $5 million. •Willing to invest in the early stages of a business. •An estimated 298,000 angels across the United States invest $21.3 billion a year in 64,380 small companies. •Their investments exceed those of venture capital firms, providing more capital to 14 times as many small companies .•Angels fill a gap in the seed capital market, specifically in the $10,000 to $2 million range. • accept between 10% and 15% of the deals that are pitched to them .•Average angel investment is $331,000 in a company that is in the seed or start-up growth stage .•70% of angels' investments lose money, but 6% produce a return more than 10 times their original investment • can be an excellent source of "patient" money The Challenge: Finding angels!-Network-Look nearby: within a 50- to 100-mile radius 7 out of 10 angels invest in companies that are within 50 miles of their homes or offices .-Informal angel "clusters" and networks 300 angel groups across the United States Internet