Ch 9 Overview

1. Ch 9 Overview • Introduction • Sources of Capital • Stock Offerings • Valuation • Exit Strategies

2. Exhibit 9-1 Seed Cash Stash Source: Data from Susan Greco, “A Little Goes a Long Way,” Inc. Magazine, October 2002.

3. 9-1 Introduction • The entrepreneurial venture requires cash to operate and grow. • In the early stages, new ventures require capital from other sources to survive. • Successful entrepreneurs learn how to articulate their venture’s business model and its market potential— elevator speech. • The elevator speech is just one of the important skills that the entrepreneur must possess to be a successful fund-raiser.

4. 9-2 Sources of Capital • Two major sources of funds for a business are: • Debt capital: Funds obtained through borrowing • Debt capital is categorized into two types: short term and long term. • Equity capital: Does not require repayment • Sources of equity capital include retained earnings.

5. 9-2a Short-Term Debt Financing • Short-term debt: Used to finance current operations, with required payback within one year • Can come from several different sources: • Friends and family • Such borrowed funds bring an extra risk • Money borrowed should be handled like any other loan • Commercial banks • They can help with any cash flow problems and can give sound advice. • Developing a close relationship with a local banker is a good idea. • When an entrepreneur needs emergency funds, the banker will be more willing to help out.

6. 9-2a Short-Term Debt Financing (cont.) • Statistics from the U.S. Small Business Administration indicate that commercial banks lent out micro-loans. • Bank loans come in many different forms: • Unsecured loans • Secured loansbacked by collateral • Line of credit • A revolving credit agreement • Factoring • Floor planning is another option in bank financing • Trade credit • The credit given to a firm by the trade—that is, by the suppliers that the company deals with. • Entrepreneur may want to use such terms to encourage clients to pay their bills in a timely manner.

7. 9-2a Short-Term Debt Financing (cont.) • Credit cards • Some entrepreneurs rely on credit cards to help finance the early stages of their ventures. • Using credit cards to finance a business can lead to problems if the cards are utilized without fiscal discipline. • The advantages include: • Ease with which they can be obtained • Universally accepted • Convenient to use • Assists the entrepreneur in financial record keeping via monthly statements • The disadvantage includes: • Relatively high rate of interest

8. 9-2a Short-Term Debt Financing (cont.) • Internal funds management • The venture should attempt to obtain its needed funds from internal sources. • A close review of the balance sheet and accounting ratios will reveal possible sources of funds that have been overlooked. • Entrepreneurs should work hand-in-hand with their accountant to ensure that funds are not tied up in noncash assets.

9. 9-2b Long-Term Debt Financing • Successful companies constantly refocus on their long-term goals and objectives. There are two primary sources of long-term debt: • Term loans • Most term loans have three- to seven-year terms. • The business signs a term loan agreement called a promissory note. • It requires some form of collateral. • When determining the interest rate for such loans, the bank looks at: • The length of time the loan is for • The type of collateral • The firm's credit rating • The general level of market interest

10. 9-2b Long-Term Debt Financing (cont.) • SBA loans: • For a smaller business, the U.S. Small Business Administration (SBA) can often be a good source of loans. • The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs. • To qualify for an SBA guaranty, a small business must meet the SBA’s criteria. • The lender must certify that it could not provide funding on reasonable terms without an SBA guaranty. • Most cases, the maximum guaranty is $1 million.

11. 9-2b Long-Term Debt Financing (cont.) • Leverage: • The use of long-term debt to raise needed cash is sometimes referred to as leverage. • The borrowed cash acts like a lever to increase the purchasing power of the owner’s investment. • It maintains higher rates of return on owners' investments. • It allows the owners to create a larger firm for the same investment. • It also means a continued obligation to service the debt. Judicious use of leverage can help increase owners' returns.

12. 9-2c Equity Capital • Equity capital: Funds invested by the owners of the venture. • Five forms of equity capital are: • Retained earnings • Contributions • Sale of partnerships • Venture capital • Public sale of stock • Stock certificate • Authorized stock • Shares sold—issued stock, and unsold shares—unissued stock.

13. Valuation • See Documents and Document Scanner

14. 9-5 Exit Strategies • The purpose of a venture’s exit strategy is: • To outline a method by which the early-stage investors can realize a tangible return on the capital they invested. • To suggest a proposed window in time that investors can tentatively target as their investment horizon. • There are four basic categories of exit strategies (other than and IPO) in order of occurrence: • Acquisition • Earn-out • Debt-equity swap • Merger