ENTR 3010- Chapter 9,10,11

Debt Financing

Obtaining borrowed funds for a company

Advantages of Debt Financing

The lender does not control business decisions

Disadvantages of Debt Financing

The company must be able to repay the loan and interest.

Collateral

An asset used as security for a loan.

Equity Financing

Obtaining funds for a company in exchange for giving investors an ownership position.

Advantages of Equity Financing

The company does not have to repay the investor's investment as a loan.

Disadvantages of Equity Financing

The owner gives up part of the company's ownership and may give investors a voice in business decisions.

Internal Funds

Money generated from within the company

External Funds

Money obtained from outside the company

Criteria for Evaluating External Sources of Funds

The length of time the funds are available

Personal Funds

Money the entrepreneur contributes to the business from personal sources

Skin in the Game

The entrepreneur's own money invested in the business

Family and Friends

People who may invest in a business because of their personal relationship with the entrepreneur.

Advantages of Family and Friends Financing

Money may be easier to obtain because of the relationship with the entrepreneur.

Disadvantages of Family and Friends Financing

Family members or friends who contribute money may expect to have input into business operations.

Written Agreement

A document signed by both parties that records the terms of a financial arrangement between family

Commercial Banks

Financial institutions that provide businesses with loans and other financial services.

Bank Lending Decisions

Decisions based on quantifiable information

Five Cs of Lending

The five factors banks consider when evaluating a loan: Character

Character

The entrepreneur's personal qualities and trustworthiness as considered in a lending decision.

Capacity

The entrepreneur's or business's ability to repay a loan.

Capital

The money the entrepreneur has invested in the business.

Conditions

Circumstances that may affect the entrepreneur or business and influence the lending decision.

Small Business Administration (SBA)

A government agency that guarantees certain loans made by private and other institutions to help small businesses access financing.

SBA Loan Guarantee

An SBA commitment to cover a portion of an eligible loan if the borrower defaults

Working Capital

Money used to cover a business's day-to-day operating needs.

Leasehold Improvements

Changes or improvements made to a rented business property.

SBA Loans

Loans supported by the Small Business Administration that generally require strong credit

SBA 7(a) Loan

The SBA's most common loan program

SBA 504/CDC Loan

An SBA loan program that provides fixed-rate financing for major fixed assets

CDC (Certified Development Company)

An organization that works with the SBA and lenders to provide financing through the 504 loan program.

SBA Microloan

An SBA program that provides small loans of up to $50

SBA Microloan Restrictions

Microloan funds cannot be used to pay existing debts.

SBA Express Loan

A loan under the SBA 7(a) program that offers faster approval decisions and can provide financing for working capital

SBA Express Loan Requirements

The business must be a for-profit entity operating in the United States

Financial Projections (Pro Formas)

Estimates of a business's expected future financial performance.

SBA 504 Loan Limits

The slideshow states a maximum of $5 million for standard projects and $5.5 million for some green projects.

Debt Refinancing

Replacing or restructuring existing debt with new financing

Legal Form of Business

Choosing what type of legal entity to use.

Sole Proprietorship

A single owner who has unlimited liability controls all decisions and receives all profits.

Sole Proprietorship Advantages

Simplest legal form of business and easiest to form and dissolve.

Partnership

Two or more individuals who pool resources to own a business and have unlimited liability.

General Partner

A partner who has decision-making authority.

Limited Partner

A type of partner in a partnership.

Corporation

A legal entity run by stockholders who have limited liability.

Corporate Continuity

A corporation's ability to continue seamlessly even with major changes.

Limited Liability Company (LLC)

A partnership and corporation hybrid that combines benefits of both.

LLC Members

The owners of an LLC.

LLC Advantages

Management flexibility credibility a separate entity personal asset protection limited personal liability sharing among members and tax benefits.

Board of Directors (BOD)

Responsible for operating and capital budgets long-term strategic plans supporting day-to-day activities resolving conflicts proper use of assets developing a network and the Sarbanes-Oxley Act.

Board of Advisors

An advisory group with no legal status that meets less frequently and is useful in family businesses especially when the board of directors consists of family members; members may be compensated per meeting or with stock options.

Sales Budget

An estimate of sales volume that includes forecasts costs of internal production versus subcontracting and ending inventory estimation.

Capital Budget

Expenditures that impact the company for more than one year such as vehicles computers facilities and equipment; involves deciding whether to lease buy used or buy new.

Pro Forma

Projected or hypothetical.

Pro Forma Income Statement

Projects net profit calculated from projected revenue minus total projected costs.

Pro Forma Income Formula

Projected revenue − total projected costs.

Pro Forma Cash Flow

Projects cash available and is not the same as profit.

Pro Forma Cash Flow Formula

Projected cash available (cash in) − projected cash disbursements (cash out).

Profit and Cash Flow

Profit as a measure of success may be deceiving if there is significant negative cash flow.

Pro Forma Balance Sheet

Summarizes projected assets liabilities and owner's equity.

Assets

Items such as inventory and equipment.

Liabilities

Amounts owed by the business that can be current or long-term.

Current Liabilities

Amounts owed within one year.

Long-Term Liabilities

Amounts due in more than one year.

Owner's Equity

The amount invested and/or retained from venture operations.

Accounting Equation

Assets = Liabilities + Owner's Equity.

Break-Even Analysis

An analysis used to determine the break-even point.

Break-Even Point

The volume of sales where the venture neither makes a profit nor incurs a loss.