Ch. 10 - Financing the Business

Finance

All activities involved in locating, collecting, and redistributing capital.

Why Do People Need to Finance?

To cover the costs long before the revenue starts.

(Ex: Rent, salaries, equipment)

4 Core Ways to Finance the Business

1. Equity from Founder

2. Grants

3. Debt

4. Equity from Investors

Equity from Founder

Many/Most/All entrepreneur founders invest their own money into their business.

Grants

• A sum of money awarded to the business often given by the government or a non profit organization. (Ex: Academic Institution) to support specific activities.

• Grants DO NOT need to be repaid, unlike loans

• Grants DO NOT dilute your ownership stake.

• Usually given to motivate business innovation and growth

• Usually focused on specific needs within a community/industry

What are the advantages of grants?

• More capital

• No equity/ownership/decision-making/control dilution

• There aren’t any risks since you don’t need to repay

What are the disadvantages of grants?

• Limited sources

• Must be a “perfect fit”

• Very time consuming (lots of paperwork = less flexibility)

What are the advantages of debt?

• You get capital (very much needed)

• There is NO equity/ownership/decision-making/control dilutio

What are the disadvantages of debt?

• The loan (debt) must be repaid, with interest, on time

• More risk (if you CANNOT repay the loan with interest on time)

• Less debt capital opportunities for “younger business owners = less flexibility”

Debt Capital

Money that is LENT to a business (or individual). A loan must ve REPAID, usually with INTEREST.

Interest

The fee paid to the lender of money for the right to use that money until its repaid.

Capital Structure

The combination of the EQUITY CAPITAL and DEBT CAPITAL that a business chooses to use in order to finance its operations and growth.

Equity Capital

Money that is being put into business in exchange for ownership, decision-making, and profits

Dilution

A decrease in the proportion owned by existing partners/shareholders, after new investors put capital into a business.

Investor

An organization that provides the capital to finance enterprise with the expectation that it will grow.

Angel Investor

Is a high-net-worth individual who invests their own personal money into early-stage, high-risk, high-potential startup companies in exchange for an ownership stake (equity/stock).

What is the primary function of the bank?

Take deposits, make loans, provide payment services.

What is the primary function of investment banks?

Help corporations raise capital by selling shares.

Stockbroker

An individual who manages investments and provides advice on buying/selling shares for clients.