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Sources of Capital: Hisrich Peters Shepherd

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Sources of Capital: Hisrich Peters Shepherd

Uploaded by

Easha Imtiaz
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© © All Rights Reserved
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Chapter 11

Sources of Capital
Hisrich
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Debt or Equity Financing
 Debt financing - Obtaining borrowed funds for
the company.(no ownershp givven to debtor)
(bnk,fmily- loan,)
 Asset-based financing; requires some asset
to be used as a collateral.
 Borrowed funds plus interest need to be paid
back.
 Show asset as collateral
 Equity financing - Obtaining funds for the
company in exchange for ownership.
 Does not require collateral.
 Offers investor some form of ownership position.
11-2
Debt or Equity Financing (cont.)

 Factors affecting type of financing:


 Availability of funds.
 Assets of the venture.
 Prevailing interest rates.
 All financing requires some level of equity;
amount will vary by nature and size of venture.

11-3
Internal or External Funds

 Internally generated funds are most


frequently employed; sources include:
 Profits.
 Sale of assets and little-used assets.
 Working capital reduction.
 Accounts receivable.
 Short-term internal source of funds:
 Reducing short-term assets - inventory, cash,
and other working-capital items.
 Extended payment terms from suppliers.

11-4
Internal or External Funds (cont.)

 Criteria for evaluating external sources of


funds:
 Length of time the funds are available.
 Costs involved.
 Amount of company control lost.

11-5
Personal Funds

 Least expensive funds in terms of cost and


control.
 Essential in attracting outside funding.
 Typical sources of personal funds:
 Savings.
 Life insurance.
 Mortgage on a house or car.
 The entrepreneur’s level of commitment is
reflected in the percentage of total assets
that the entrepreneur has committed.
11-6
Family and Friends

 Likely to invest due to relationship with


entrepreneur.
 Advantages - Easy to obtain money; more patient
than other investors.
 Disadvantage - 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 incase business fails.
11-7
Commercial Banks

 Types of Bank Loans (Asset based)


 Accounts receivable loans.
 Inventory loans.
 Equipment loans.
 Real-estate loans.
 Cash flow financing (Conventional bank loans)
 Installment loans.
 Straight commercial loans.
 Long-term loans.
 Character loans.

11-8
Commercial Banks (cont.)

 Bank Lending Decisions


 Based on quantifiable information and subjective
judgments.
 Decisions are made according to the five Cs of
lending- Character, Capacity, Capital, Collateral,
and Conditions.mcq
 Review of past financial statements and future
projections.
 Questions are asked regarding ability to repay
the loan.

11-9
Research and Development
Limited Partnerships (gp accelator)
 Money given to a firm for developing a
technology that involves a tax shelter.
 Major elements:
 Contract - Liability for loss incurred is borne by
the limited partners; tax advantages to both
parties.
 Limited partnership - A party that usually
supplies money and has a few responsibilities.
 Sponsoring company- Acts as the general
partner; has the base technology but needs
funds to develop it.
11-10
Research and Development
Limited Partnerships (cont.)
 Procedure
 Funding stage - Establishment of contract;
investment of money; documentation of terms
and conditions, and scope of research.
 Development stage - Sponsoring company
performs actual research.
 Exit stage - Commences when technology is
successfully developed; sponsoring company
and the limited partners commercially reap the
benefits through either equity partnerships,
royalty partnerships, or joint ventures.

11-11
Research and Development
Limited Partnerships (cont.)
 Benefits:
 Provides funds with minimum amount of equity
dilution.
 Reduces the risks involved.
 Strengthens sponsoring company’s financial
statements.
 Costs:
 Expending of time and money.
 Restrictions placed on technology can be
substantial.
 Exit from the partnership may be too complex.
11-12
Government Grants

 The Small Business Innovation Research


(SBIR) program was created as part of the
Small Business Innovation Development
Act.
 All federal agencies with R&D budgets in excess
of $100 million must award a portion of their
R&D funds to small businesses through the SBIR
grants program.
 Offers a uniform method by which each
participating agency solicits, evaluates, and
selects the research proposals for funding.

11-13
Government Grants (cont.)

 Phase I
 Awards up to $100,000 for six months of feasibility-
related experimental or theoretical research.
 Phase II
 Awards are up to $750,000 for 24 months of further
R&D.
 Money is used to develop prototype products/ services.
 Phase III
 Does not involve direct funding from the SBIR
program.
 Commercialization of technology through funds from
private sector or regular government procurement
contracts.
11-14
Government Grants (cont.)

 Procedure
 Solicitations describing areas for funding are
published by government agencies.
 Proposal is submitted by a company or
individual.
 Screening of received proposals.
 Evaluation of proposal on a technological basis.
 Granting of awards based on potential for
commercialization.
 Research findings are owned by the company or
individual, not by the government.
11-15
Private Placement

 Types of Investors
 Investor can influence nature and direction of
the business.
 May be involved in the business operation.
 Entrepreneur needs to consider degree of
involvement.
 Private Offerings
 A formalized method for obtaining funds from
private investors.
 Faster and less costly.

11-16
Bootstrap Financing

 Outside capital:
 Usually takes between three and six months to
raise.
 Often decreases a firm’s drive for sales and
profits.
 Increases the impulse to spend.
 Decreases the company’s flexibility.
 May cause disruption and problems in the
venture.

11-17
Bootstrap Financing (cont.)

 Bootstrap financing involves using any


possible method for conserving cash such
as:
 Use of discounts for volume.
 Frequent customer discounts.
 Promotional discounts.
 “Obsolescence money”.
 Savings through bulk packaging.
 Consignment financing.

11-18

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