Debt and Equity

Financing Your
Business
Back to Table of Contents

Chapter 19 Financing Your Business
Financing Your
Business
19.1 Financing the Small Business

Start-Up
19.2 Obtaining Financing and

Growth Capital
2
Financing Your Business
19.1
Describe the resources available to

entrepreneurs to start their businesses.
Compare and contrast sources of financing for
start-up ventures.
Describe the importance of financial planning.
Section 19.1 Financing the Small Business Start-Up 3

19.1
Entrepreneurs use their creative talents to secure

necessary resources to start their businesses.
Most start-up funds come from an entrepreneurs

personal resources; however, there are other
common sources of funding.

19.1
bootstrapping venture capital

factor venture capitalists
equity capital debt capital
equity operating capital
risk capital line of credit
angel trade credit

Entrepreneurial Resources
One of the unique talents of entrepreneurs is

finding the resources to launch a business requires
the understanding of:
Short-term needs, those associated with

activities not part of normal operations
Long-term capital needs, relating to preparation
for future growth.

Bootstrapping
Most entrepreneurs get bootstrapping

their businesses started by operating a business as
frugally as possible and
bootstrapping. cutting all unnecessary
expenses, such as
borrowing, leasing, and
partnering to acquire
resources

Bootstrapping
Bootstrapping involves:
hiring as few employees as possible

leasing anything you can
being creative

Bootstrapping
Bootstrapping factor an agent who

entrepreneurs can also ask handles an
entrepreneurs accounts
suppliers to allow for longer receivable for a fee
payments terms, ask
customers to pay in
advance, or sell their
accounts receivable to a
factor.

Start-Up Money
The main sources for start-up money for

entrepreneurs include:
friends
family
other resources, such as savings, credit
cards, loans, and investments

Financing the Start-Up
Some sources of financing include:
banks
finance companies
investment companies
government grants

Sources of Equity
Financing
To obtain equity capital as equity capital cash
a source of funding for a raised for a business in
exchange for an
business, the owner must ownership stake in the
give equity to obtain the business
financing.
equity an ownership in
a business

Sources of Equity
Financing
Equity funding is risk capital money
sometimes called risk invested in companies
where there is financial risk
capital.

Sources of Equity Financing
Personal Friends and

savings family
State-
sponsored venture Forms of
Private
Equity investors
capital Financing
funds
Venture
Partners
capitalists

Sources of Equity
Financing
An angel often invests angel a private,
because of his or her belief nonprofessional investor,
such as a friend, a relative,
in a business concept and or a business associate,
the founding team. who funds start-up
companies

Sources of Equity
Financing
An existing business can venture capital a source
use venture capital of equity financing for
small businesses with
financing to raise large exceptional growth
amounts of money to potential and experienced
achieve its goals. senior management

Sources of Equity
Financing
Venture capitalists often venture capitalists
provide managerial and individual investors or
investment firms that
technical expertise to small invest venture capital
businesses. professionally

Sources of Debt Financing
Sources of debt capital are debt capital money

far more numerous than raised by taking out loans,
which must be repaid with
sources of equity capital, interest
but the entrepreneur must
be certain the business can
generate enough cash flow
to repay the loan.

Banks Trade credit
Small Minority enterprise

business
Sources of
development
investment Debt
programs
companies Financing
Commercial
SBA loans finance
companies

Banks were once the operating capital money

primary source of a business uses to
support its operations in
operating capital, but the short term
today they are much more
conservative in their lending
practices.

An established business line of credit an

can usually get a line of arrangement whereby a
lender agrees to lend
credit from a bank, which it up to a specific amount
can borrow against. of money at a certain
interest rate for a
specific period of time

Some businesses may trade credit credit one

seek trade credit from business grants to
another business for the
other companies in their purchase of goods or
industry as a form of debt services; a source of
financing. short-term financing
provided by one
business within another
businesss industry or
trade

Financial Planning for

Your Business
Financial planning involves finding the right kind
of financial resources at the right time in the right
amount.

Financial Planning for

Your Business
Financial planning involves:
Identifying the stages of growth in your

business
Identifying milestones that require resources
Identifying business advisers
Hiring an excellent management team

19.1
1. Describe the resources available to

entrepreneurs to start their business.
Most entrepreneurs start their businesses by

bootstrapping or using personal resources such
as friends, family, savings, credit cards, loans,
and investments.

19.1
2. Compare and contrast sources of financing

for start-up ventures.
Entrepreneurs have two options: equity or debt financing. Equity

sources trade cash for some portion of ownership, or equity, in a
business. With debt financing, an entrepreneur borrows money and
repays it with interest, and retains full ownership of the business.
However, the loan must be carried as a liability on the businesss
balance sheet. For this approach to be successful, your business
must generate enough cash flow to repay the loan.

19.1
3. Describe the importance of financial

planning.
Financial planning provides you with a better

chance of securing the money you need when
you need it in the right amount.

19.2
Describe the information needed to obtain

financing.
Explain the types of growth financing
available to entrepreneurs.
Describe how to calculate start-up capital
requirements.
Section 19.2 Obtaining Financing and Growth Capital 28

19.2
Additional sources of funding become available

when entrepreneurs are ready to grow their
businesses.
Entrepreneurs must calculate their start-up needs

so they can communicate this information to
potential funders.

19.2
pro forma due diligence

character private placement
capacity initial public offering (IPO)
capital stock
collateral working capital
conditions contingency fund

How to Obtain Financing
To obtain financing, you pro forma proposed or

must create pro forma estimated financial
statements based on
financial statements to predictions of how the
include in your business actual operations of the
plan. business will turn out

What Venture Capitalists

Expect
Venture capitalists rarely invest in start-up
companies, but when they do, they expect:
A 30 to 70 percent return on their investment

for start-ups
A 50 percent or more return for an early
stage venture
A business with good management

What Private Investors

Expect
Private investors, or angels, expect:
businesses they understand

investing with like-minded investors
ten times their investment at the end of five
years
a strong management team

What Bankers Expect
Commercial lenders like banks rely on the five Cs

to determine the acceptability of a business loan
applicant:
Character
C
Capacity
C
Capitol
C
Collateral
C
Conditions
C
What Bankers Expect
A bank must believe in character a borrowers

the character of the reputation for fair and
ethical practices,
entrepreneur. including business
experience, dealings with
other businesses, and
reputation in the
community

What Bankers Expect
Banks consider the capacity the ability of a

capacity of a business to business to pay a loan in
view of its income and
pay its debts. obligations

What Bankers Expect
Banks place a strong capital the net worth of

emphasis on whether a a business, the amount
by which its assets
business has a financially exceed its liabilities
stable capital structure.

What Bankers Expect
Banks are more likely to collateral security in the

lend to businesses with form of assets that a
company pledges to a
valuable collateral. lender

What Bankers Expect
Banks consider all the conditions the

conditions in which the circumstances at the time
of the loan request,
business operates. including potential for
growth, amount of
competition, location,
form of ownership, and
insurance

Types of Growth Financing
If your company has established a successful

track record, there are other types of financing
available, including:
venture capital (VC) companies

private placements
initial public offerings (IPOs)

Venture Capital (VC)

Companies
If a VC firm is interested due diligence the
in funding your business investigation and analysis
a prudent investor does
and decides you have a before making business
sound business plan, it decisions
will begin due diligence.

Private Placements
Private placement is a private placement a

way to raise capital by private offering or sale of
securities directly to a
selling ownership interests limited number of
in your private corporation institutional investors who
or partnership. meet certain suitability
standards; ownership
interests are called
securities

Initial Public Offerings

(IPOs)
An initial public offering initial public offering
(IPO) is a popular way to (IPO) the sale of stock in
a company on a public
raise a lot of money for stock exchange
growth since all proceeds
go to the company.


(IPOs)
The CEO of a company stock a type of security
that has made an IPO is that signifies ownership in
a corporation and
primarily responsible to the represents a claim on part
people who own the of the corporations
company stock. assets and earnings


(IPOs)
There are five steps to become a public company
with stock for sale on a public exchange.
1. Choose an underwriter or investment banker.

2. Draw up a letter of intent.
3. File a registration statement with the SEC.
4. Announce the offering in the financial press.
5. Do a road show.

Calculating Your Start-Up

Capital Needs
You will need to calculate exactly how much
money you will need to start or grow your
business.
This requires estimating start-up costs, capital

expenditures, working capital (operating costs),
and contingency funds.

Start-Up Costs
Start-up costs are those costs you incur before

you start a business.

Start-Up Costs
Start-up costs may include:
furniture, fixtures, and equipment

promotion expenses and office supplies
fees and licenses

Operating Costs
Operating costs, often working capital the

referred to as working amount of cash needed to
carry out the daily
capital, cover the time operations of a business
between selling your that ensures a positive
product or service and cash flow after covering
all operating expenses
receiving payment from the
customer.

Contingency Funds
Since no one can predict contingency fund an

the future, you should extra amount of money
that is saved and used
include a contingency only when absolutely
fund in your start-up necessary, such as for
calculations. unforeseen business
expenses

19.2
1. Describe the information needed to obtain

financing.
After identifying potential sources of investors, you

need to prepare estimated financial statements
based on predictions of how the actual operations of
a business will turn out. Your financial plan must
include income statements, cash flow statements,
and balance sheets.

19.2
2. Explain the types of growth financing

available to entrepreneurs.
Venture capital (VC) companies are unlikely sources but may

be an option to companies with a proven concept and a huge
growth potential. Private placement is a way to raise capital by
selling ownership interests in a private corporation or
partnership. Initial public offerings (IPOs) are sales of stock in
a company on a public stock exchange.

19.2
3. Describe how to calculate start-up capital

requirements.
Entrepreneurs can figure start-up costs by talking to suppliers,

vendors, manufacturers, distributors, and others in their industry.
Entrepreneurs need to figure capital expenditures, which are
costs to purchase equipment and facilities. Next, entrepreneurs
need to calculate working capital, how much cash is needed to
carry out daily operations. Finally, they must figure contingency
funds, extra money used for unforeseen business expenses.

Technology Enabled
Marketing
Technology enabled marketing (TEM) ties all of a businesss
departments, such as sales, production, and marketing,
together so they can all work from the same pool of data.
Sales force automation and online customer service are

forms of TEM.

Tech Terms
online customer service
the service businesses provide to customers via the Internet
sales force automation

tools that automate the business tasks of sales, such as order
processing, contact management, lead tracking, and inventory control

End of
Financing Your
Business
Back to Table of Contents

Debt and Equity

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Debt and Equity

Uploaded by

Copyright:

Available Formats

Financing Your

Back to Table of Contents

19.1 Financing the Small Business

19.2 Obtaining Financing and

Describe the resources available to

Section 19.1 Financing the Small Business Start-Up 3

Entrepreneurs use their creative talents to secure

Most start-up funds come from an entrepreneurs

Section 19.1 Financing the Small Business Start-Up 4

bootstrapping venture capital

Section 19.1 Financing the Small Business Start-Up 5

One of the unique talents of entrepreneurs is

Short-term needs, those associated with

Section 19.1 Financing the Small Business Start-Up 6

Most entrepreneurs get bootstrapping

Section 19.1 Financing the Small Business Start-Up 7

hiring as few employees as possible

Section 19.1 Financing the Small Business Start-Up 8

Bootstrapping factor an agent who

Section 19.1 Financing the Small Business Start-Up 9

The main sources for start-up money for

Section 19.1 Financing the Small Business Start-Up 10

Financing the Start-Up

Some sources of financing include:

Section 19.1 Financing the Small Business Start-Up 11

Section 19.1 Financing the Small Business Start-Up 12

Section 19.1 Financing the Small Business Start-Up 13

Personal Friends and

Section 19.1 Financing the Small Business Start-Up 14

Section 19.1 Financing the Small Business Start-Up 15

Section 19.1 Financing the Small Business Start-Up 16

Section 19.1 Financing the Small Business Start-Up 17

Sources of Debt Financing

Sources of debt capital are debt capital money

Section 19.1 Financing the Small Business Start-Up 18

Banks Trade credit

Small Minority enterprise

Section 19.1 Financing the Small Business Start-Up 19

Sources of Debt Financing

Banks were once the operating capital money

Section 19.1 Financing the Small Business Start-Up 20

Sources of Debt Financing

An established business line of credit an

Section 19.1 Financing the Small Business Start-Up 21

Sources of Debt Financing

Some businesses may trade credit credit one

Section 19.1 Financing the Small Business Start-Up 22

Financial Planning for

Section 19.1 Financing the Small Business Start-Up 23

Financial Planning for

Identifying the stages of growth in your

Section 19.1 Financing the Small Business Start-Up 24

1. Describe the resources available to

Most entrepreneurs start their businesses by

Section 19.1 Financing the Small Business Start-Up 25

2. Compare and contrast sources of financing

Entrepreneurs have two options: equity or debt financing. Equity

Section 19.1 Financing the Small Business Start-Up 26

3. Describe the importance of financial

Financial planning provides you with a better

Section 19.1 Financing the Small Business Start-Up 27

Describe the information needed to obtain

Section 19.2 Obtaining Financing and Growth Capital 28

Additional sources of funding become available