Chapter 11 - Sources of Capital

These flashcards focus on the various sources of capital for businesses, covering definitions and key concepts related to financing options.

Debt Financing

Obtaining borrowed funds for the company that requires repayment plus interest.

Equity Financing

Obtaining funds for a company in exchange for ownership, which does not require collateral.

Asset-based Financing

A type of debt financing that requires an asset to be used as collateral.

5 C's of Financing

Factors considered in financing: Character, Capacity, Capital, Conditions, and Collateral.

Commercial Banks

Financial institutions that offer various types of loans to businesses, including asset-based and conventional loans.

Small Business Administration (SBA)

An agency that guarantees loans made by private institutions and supports small businesses through funding.

Private Financing

Investment from private individuals or 'angels' who often take an equity stake in the company.

What are internally generated funds & their sources?

• Profits reinvested (plowed back)

• Sale of unused/little-used assets

• Reducing working capital (inventory, cash, etc.)

• Accounts receivable (factoring)

What are external sources of funds & how are they evaluated?

• Extended payment terms from suppliers (delayed payments)

• Evaluation Criteria:

  • Length of time funds are available

  • Cost of the funds

  • Amount of control given up

What are personal funds & why are they important?

• Least expensive source (low cost, no loss of control)

• Helps attract outside investors

• Sources: Savings, life insurance, mortgages (house/car)

• Shows entrepreneur’s commitment (how much of their own money is invested)

FAMILY AND FRIENDS investing advantages

Easy to obtain money; more

patient than other investors.

FAMILY AND FRIENDS investing disadvantages

Direct input into operations of

venture.

A formal agreement must include:

Amount of money involved.

Terms of the money.

Rights and responsibilities of the investor.

Steps to be taken in case business fails.

What types of loans do commercial banks offer & how do you secure one?

• Types of Loans:

  • Asset-based: Accounts receivable, inventory, equipment, real estate

  • Cash flow financing: Installment, straight commercial, long-term, character loans

• Getting a Loan (“Bank Shopping”):

  • Complete application (mini business plan)

  • Compare banks

  • Choose one experienced in your industry

  • Set appointment & present your case

  • Borrow the maximum amount possible

What is the role of the SBA in financing?

• The Small Business Administration (SBA) guarantees loans made by private lenders (not direct lender)

• Funds can be used for:

  • Working capital

  • Machinery & equipment

  • Furniture & fixtures

  • Land & buildings

  • Leasehold improvements

  • Debt refinancing (in some cases)

What are SBA eligibility criteria for small-business financing?

• Must show ability to repay

• Must meet the Five Cs of credit

• Business must meet size requirements

• Must be an eligible business type

• Must use funds for approved purposes

• Must show lack of other funding sources

• Owners with 20%+ ownership must personally guarantee the loan

R&D LIMITED PARTNERSHIPS

Money given to a firm for developing a technology

that involves a tax shelter.

Limited partnership

A party that usually

supplies money and has few responsibilities.

Sponsoring company

Acts as the general

partner; has the base technology but needs

funds to develop it.

What is the SBIR program?

• The Small Business Innovation Research (SBIR) program was created by the Small Business Innovation Development Act

• Federal agencies with over $100 million in R&D budgets must allocate part of their funds to small businesses

• Provides grants for research and innovation

• Standard process for agencies to solicit, evaluate, and select research proposals

Name at least 3 types of federal agencies

• Department of Defense (DOD)

• National Aeronautics and Space Administration (NASA)

• Department of Energy (DOE)

• Department of Health and Human Services (DHHS)

• National Science Foundation (NSF)

• U.S. Department of Agriculture (USDA)

• Department of Transportation (DOT)

• Nuclear Regulatory Commission (NRC)

• Environmental Protection Agency (EPA)

• Department of Education (DOED)

• Department of Commerce (DOC)

Phase I SBIR Awards

Grants up to $100,000 for six months of initial feasibility research.

Phase II SBIR Awards

Grants up to $750,000 for 24 months of further R&D to develop prototypes.

Phase III SBIR

Definition: No direct funding from SBIR program; helps you start and develop idea to get government contracts or private investors

What is bootstrap financing?

Bootstrap financing is when a business conserves cash by using low-cost or creative funding methods instead of borrowing. It includes:

• Volume discounts

• Customer/promotional discounts

• “Obsolescence money” (using outdated or leftover inventory value)

• Savings from bulk packaging

• Consignment financing (selling goods without paying upfront for inventory)