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  2. ENTREPRENEURIAL FINANCE Much has been written about entrepreneurs and their unique characteristics. A common fallacy regarding small business entrepreneurs is that they are driven to build immense empires. That is generally not the case.

  3. ENTREPRENEURIAL FINANCE The fact is, most true entrepreneurs start their businesses simply to generate a "living" and a steady stream of income. As true entrepreneurs, however, they must also be their own person, make their own decisions, and the business must run their way.Among their many characteristics, entrepreneurs.....

  4. ENTREPRENEURS • are risk takers and believe in themselves, their ideas, and their hunches. True entrepreneurs seldom give up and will never quit seeking a successful venture.• are competitive and strive to earn respect from both customers and competitors. They compete with themselves and believe they control their own destiny.

  5. ENTREPRENEURS • tend to be loners and thinkers who are often attracted to home-based businesses. They spend serious amounts of "alone time" analyzing problems and theorizing solutions and are always thinking up new ideas for beginning somenew venture.

  6. ENTREPRENEURS • are goal oriented and once a goal is achieved, they may well replace it with an even loftier goal. • are multi-taskers. Once a new idea is envisioned, they will then quickly develop a sense of urgency towards its fruition.

  7. ENTREPRENEURS • tend to have a never ending sense of urgency to develop their new ideas. In fact, it is most often only their inability to finance their many ideas and projects that truly limits an entrepreneur's potential for success.

  8. ENTREPRENEURIAL FINANCE This presentation and its accompanying booklet, When Banks Say “No!”, is designed to assist small business entrepreneurs in understanding the world of Early Stage Financing Alternatives and in particular... • commercial accounts factoring• asset based lending• purchase order finance

  9. WHAT IS SMALL BUSINESS? The U.S. Office of Advocacy defines a small business as an independent for-profit business with fewer than 500 employees. When attempting to qualify for government contracts, the U.S. Small Business Administration furthers that definition by defining size requirements by business type. The complete listing is available at www.sba.gov/size.

  10. SMALL BUSINESS NUMBERS According to the most recent census data, the U.S. Department of Commerce estimates there were 27.2 million businesses in the United States of which 6 million had employees. Of those with employees, 99.9% were defined as "small business" (those firms with fewer than 500 employees).

  11. NEED FOR FINANCE Unfortunately, data also reveals that one third of all these small businesses started end up failing within the first two years of operation and less than 50% survive four years. One of the greatest causes of small business failure is their inability to secure adequate financing in their early stages of existence.

  12. ENGINE OF GROWTH Throughout the world, small business is recognized as the true engine of economic growth. According to the U.S. Small Business Administration (SBA), small business ventures make up nearly 99% of all known businesses in America with numbers now totaling over 22 million.

  13. STARTUP FINANCING Most small business ventures are initially launched with the personal savings or other assets of the founder. Sources of startup capital are most often bank savings accounts, investment accounts (stocks and bonds), loans collateralized by the family home or other real estate, credit cards, or personal loans from friends and family.

  14. STARTUP FINANCING Few new companies are ever started with funds from true "angel investors" or formal venture capital. Typically, entrepreneurs will actually be faced with the task of raising capital in two generic rounds, with...

  15. RAISING CAPITAL • round "A" being an initial start up round where savings and funds from friends and family are utilized. And... • round "B" being more traditional financing from banks and more formalized lenders.

  16. RAISING CAPITAL While the understanding of rounds "A" and "B" financing is acceptable, it paints the true picture of entrepreneurial finance with a much too simplistic brush. For a better understanding of the actual stages associated with types of business finance, the definitions commonly utilized in the professional venture capital industry are much more appropriate. Among these are:

  17. STAGES OF FINANCE • Seed: the concept or idea stage of a business where money is needed to research feasibility. • Startup: financing prior to initial operation.

  18. STAGES OF FINANCE • First Stage: an operating business with capital needs for equipment, payroll, and marketing.• Second Stage: growth capital now required with good First Stage results. • Bridge: temporary financing between other financing rounds.

  19. STAGES OF FINANCE • Mezzanine: equity financing that is prior to an initial public offering (IPO). • Franchise Funding: financing for the purchase of a franchise. • Leveraged Buyout: financing to purchase another established company using the combined assets for purchase. 

  20. STAGES OF FINANCE • Recapitalization: financing revolving around the restructuring of a company's balance sheet and increasing or decreasing the company's debt. • Bankruptcy: financing to acquire another company operating under a filing of bankruptcy in Federal Court

  21. DEBT vs. EQUITY FINANCING In order to grow their businesses, it is crucial for all entrepreneurs to have access to "ready" capital. Commercial banks and other depository institutions have historically been the largest providers of financing for small business, accounting for approximately 65% of all financing through commercial loans (including those for non-residential mortgages, vehicles, equipment, and leases).

  22. DEBT vs. EQUITY FINANCING Though a variety of resources for commercial financing are available worldwide, actual providers of business capital can be broken down into two very broad categories. Those that provide equity investment alternatives, and those that financing through debt.

  23. EQUITY FINANCING Equity Financing...can be described as the exchange of money for a percentage of ownership in a business. Equity financing allows a business owner to acquire funds without the expense of servicing debt. It typically does not encumber assets such as equipment, inventory, and accounts receivable and is normally accessed through venture capital companies.

  24. DEBT FINANCING Debt Financing...refers to borrowed money that is paid back over time. Debt financing is flexible and can be for varied periods of time (short term or long term). The lender does not gain an ownership interest and the obligation of the business owner is simply to repay the loan as set forth in the lending agreement.

  25. DEBT vs. EQUITY Debt and equity financing offer significantly different opportunities / responsibilities when raising capital. Some of the many advantages and disadvantages of both methods include:

  26. DEBT FINANCING • Does not dilute an owner's interest in the company. • Other than variable rate loans, repayment is fixed. • Interest expense is deductible on tax returns. • No shareholder servicing requirements.

  27. EQUITY FINANCING • Requires no periodic payment of interest. • Will not affect a company's cash flow. • Does not encumber assets. • Does not require budgeting for principal repayment.

  28. ACCESS to FINANCING A common source of frustration to virtually all small business entrepreneurs is their inability to access credit through the traditional banking system as they attempt to grow their businesses. Banks and traditional lenders are severely regulated and covenant restricted when attempting to provide truly accessible financing and small business loans to startup entrepreneurs.

  29. ACCESS to FINANCING For most small business entrepreneurs, it is when their business is initially successful through its start up and first stage operation that the entrepreneur is confronted with his/her first cash flow problems. It is at this stage that the initial cash grub stake from savings, credit cards, and friends and family is "burned through" and immediate additional financing becomes necessary.

  30. ACCESS to FINANCING This is also when an understanding of the many financing options offered by such federal agencies as the Small Business Administration and the United States Export-Import Bank become highly important and when an in-depth understanding of the alternative commercial finance (ACF) industry may become critical.

  31. The SBA and EX-IM BANK The U.S. Small Business Administration (SBA) and the Export-Import Bank of the United States (Ex-Im Bank) are two independent federal agencies with powerful financing options for small business entrepreneurs. The SBA was created in 1953 for the purpose of aiding, counseling, assisting, and protecting the interest of small business concerns and free enterprise.

  32. The SBA and EX-IM BANK Export-Import Bank of the Unites States was empowered in 1934 as the official export credit agency of America. Both government agencies provide extensive financial services to small and mid-size businesseswith a broad range of programs.

  33. FACTORING and ACF The global community of factoring and alternative commercial finance providers offer an extensive and powerful source of financing options for start up / first stage companies struggling in their early, formative years of operation as well as larger, seasoned companies in the various growth, expansionand operational stages of their existence.

  34. FACTORING and ACF The spectrum of factoring and ACF products directly addresses the problems faced by those entrepreneurs which, for a variety of reasons, are unable to access traditional bank financing and lines of credit and the early stage capital required to grow their ventures.

  35. ALTERNATIVE COMMERCIAL FINANCE Worldwide, there are literally dozens of unique financial product areas that join to make up the entirety of what is termed the alternative commercial finance community with some being more favorable than others in particular economies and geographic regions.

  36. ALTERNATIVE COMMERCIAL FINANCE For their ability to provide ready access of capital to entrepreneurs and to generally meet the working capital and cash flow problems of start up and early stage small business, several areas clearly stand out among the rest. These areas include...

  37. FACTORING Commercial Factoring...one of the oldest known forms of commercial finance, factoring is also characterized by its simplicity. It directly addresses those cash flow problems associated with accounts receivable of a business, slow paying customers upon those accounts, and the granting of terms of payment to customers in order to become more competitive and to secure more business.

  38. ASSET-BASED LENDING Asset-Based Lending...similar to factoring in some ways, asset-based lending solutions can be employed in a multitude of industries where financing of accounts receivable, inventories, and equipment is essential for growth.

  39. PURCHASE ORDER FINANCE Purchase Order Finance...simply put, purchase order finance involves the process of providing capital to business owners needing to purchase or to actually manufacture goods to fill large orders priorto shipment. It is often necessary to facilitate handling transactions involving major retailers.

  40. MERCHANT CASH ADVANCES Merchant Cash Advances...a relatively new area of small business finance but with broad availability, MCAs provide cash advances on future, anticipated credit card receipts of retailers which can be used forgrowth and expansion.

  41. BANKS vs. ACF For entrepreneurs in the early high-growth period of developing their business, ACF offers some significant advantages to traditional financing. One such advantage is the ability to finance each asset of a company separately. When banks provide financing, they will typically require all assets of the company as collateral and file a "blanket lien" when perfecting their loan.

  42. BANKS vs. ACF With such a blanket lien filing, the single loan will be secured (collateralized) by inventory, accounts receivable, machinery, equipment, patents, rents, and any other asset of the company. In such cases, bank loans are often significantly over collateralized. With ACF, collateral is typically taken separately.

  43. ACF EVOLUTION Alternative commercial finance is a community rich in history and legend. Factoring, for example, may well be the oldest form of commercial finance known to man though most know little of its extensive history and remarkable problem solving capabilities when compared to more traditional business financing methods.

  44. ACF EVOLUTION Factoring is literally centuries older thanmodern day banking and some of history's earliest recorded commercial transactions of both the ancient Egyptians and Phoenicians reference features similar to modern day factoring.

  45. ACF EVOLUTION Asset-Based Lending's earliest beginningscan be traced to a pair of encyclopedia salesman, Arthur Jones and John Little who started the first finance company, Mercantile Credit Company, in 1904 which offered accounts receivable financing. Asset-based lending has grown steadily since and now accounts for over 20% of all short term business credit in the U.S.

  46. TODAY’S ACF INDUSTRY Overall, today's alternative commercial finance industry is enormous with asset-based lending transactions alone accounting for over $545 billion in terms of outstanding loans annually. Factoring, known affectionately as the industry's "crown jewel", has grown to an annual volume of roughly $135 billion domestically.

  47. TODAY’S ACF INDUSTRY But as far as factoring is concerned, that is only the tip of the iceberg. Recent statistics compiled by the international factoring organization, Factors Chain International, quotes total global factoring now reaching an epic annual volume of nearly $1.3 trillion.

  48. TODAY’S ACF INDUSTRY Other areas are expanding just as rapidly. According to ELFA, the Equipment Leasing and Finance Association, the $650 billion leasing industry is adding nearly $6 billion in new equipment leases every month.

  49. TODAY’S ACF INDUSTRY When you additionally begin to include the many unique niche product areas such as forfaiting, purchase order finance, merchant cash advances, etc., the overall dollar volume of specialized, non-traditional bank financing done throughout the world is many trillions of dollars each and every year.

  50. ACCESSING ACF While many of the product areas, associated with the alternative commercial finance industry are well established throughout the world, some are relatively new. What has changed markedly in the past 10-15 years is the broad access to knowledge of alternative commercial finance products. This has occurred primarily due to two major influences:

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