CHAPTER 10: FINANCING AND PRODUCING GOODS

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Section 1: Investing in the Free Enterprise System  Entrepreneurs are often looking for financial backers who are willing to take a chance on their small business. People who make a living off taking risks by investing in startups are known as venture capitalists.

Turning Savings into Investments  Financing business expansion  You put your money in the bank to make interest  the bank lends money to businesses for expansion  the businesses buy property and equipment, and hire workers  the businesses pay interest to the bank for the loan  the bank pays you interest

Before You Pursue Financing  Cost-benefit analysis- A financial process in which a business estimates the cost of any action and compares it with the benefits of that action   Estimate cost of business expansion  Calculate expected revenues  Calculate expected profits  Calculate cost of interest on loan  If the profits are greater than the cost of the loan plus interest (long-term), then the loan is worth it  If the loan is going to cost you $20,000, but you can expect to make an additional $25,000, then it is worth it. Of course, nothing is guaranteed

Investment Financing  It is a competitive market, and financial institutions can pick and choose what businesses to give financing to, so in order to get financing, a business must appear professional, have all its previous debts paid, and appear reliable and trustworty

Section 2: Types of Financing for Business Operations

Three Kinds of Financing  Based on length of time of repayment  the longer it takes to repay, the more you will pay in interest  Short-term financing- for seasonal or monthly expenses  Intermediate-term financing- borrowing for land, equipment, etc; term of 1-10 years  Long-term financing- issuing stocks or selling bonds; used for major business expansion; will take longer than 10 years to see a profit

Types of Financing Short-term Intermediate Long-term stocks bonds loans leasing Trade credit Line of credit loans

Choosing the Right Financing  You must consider several factors when deciding on how to raise capital for expansion  Interest costs- if interest rates are high, loans are expensive, and selling bonds requires a high interest payout, so selling stock might be the right option  Financial condition of the company  Market climate- recession might mean delay of expansion  Control of the company- selling stocks means giving up some control