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Chapter 16 Obtaining Debt Capital

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Sources of Debt Capital Trade credit Commercial banks Finance companies Factors Leasing companies

Trade Credit Trade credit—the ability to buy goods and services and have 30, 60, or 90 days to pay for them Major source of short-term funds for small businesses Represents 30 to 40 percent of the current liabilities of non- financial companies, with generally higher percentages in smaller companies

Commercial Banks Common types of financing involving the use of a bank Line of credit loans Time-sales finance Term loans Chattel mortgages and equipment loans Conditional sales contracts Plant improvement loans

Commercial Finance Companies Frequently lend money to companies that do not have positive cash flow Will not make loans to companies unless they consider them viable risks; usually more accepting of risk than are banks

Factoring Factoring—a form of accounts receivable financing where the receivables are sold, at a discounted value, to a factor The factor buys the client’s receivables outright, without recourse, as soon as the client creates them, by shipment of goods to customers Cash is made available to the client as soon as proof is provided (old-line factoring) or on the average due date of the invoices (maturity factoring)

Leasing Companies Leasing companies—leases common and readily resalable items such as automobiles, trucks, typewriters, and office furniture to both new and existing businesses Up front payment required of about 160 percent of the value of the item being leased Interest may be more or less than other forms of financing, depending on the equipment leased, the credit of the lessee, and the time of year

What to Look for in a Bank Knowledge Sense of urgency Teaching talent Industry knowledge Financial stability Manager with backbone

The TLC of a Banker or Other Lender Key preparation steps for the entrepreneur and the management team Present their case, negotiate, and then lose the deal After the loan is granted, borrowers should maintain an effective relationship with the lending officer

The TLC of a Banker or Other Lender Your banker is your partner, not a difficult minority shareholder Be honest and straightforward in sharing information Invite the banker to see your business in operation Always avoid overdrafts, late payments, and late financial statements

The TLC of a Banker or Other Lender Answer questions frankly and honestly. Understand the business of banking Have an “Ace in the Hole”