1. 11-1 © 2005 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 11-2 Chapter 11 Sources of Capital

3. 11-3 Overview  Debt Financing- Interest-Bearing Instrument Requiring Collateral (Asset)  Equity Financing- Investor Receives Ownership Position  Financing Usually A Combination Of Debt And Equity

4. 11-4 Factors Affecting Type Of Financing 1)Availability of Funds 2)Assets of Venture 3)Prevailing Interest Rates 4)All Financing Requires Some Level of Equity

5. 11-5 Internal Funds  Profits  Sale of Assets- Rent Instead Of Purchase  Working Capital Reduction  Extended/Discounted Payment Terms- Suppliers  Accounts Receivable- Speed Up Collection  Reduction of:  Inventory  Cash  Working Capital Items

6. 11-6 External Funds  Self  Family & Friends  Suppliers & Trade Credit  Commercial Banks  Government Loan Programs  R & D Limited Partnerships  Venture Capital  Private Equity Placements  Public Equity Offerings  Other Government Programs

7. 11-7 Personal Funds  Essential To Attract Outside Capital- Indicates Owner Commitment, % Of Personal Assets  Sources:  Savings  Life Insurance  House/Car Mortgage

8. 11-8 Family & Friends  Requires Knowledge Of Entrepreneur  Disadvantage- Direct Input Into Operations  Advantage- Often More Patient  Must Be Done In Business-Like, Written Manner With Terms, etc.  Will Loss Have Severe Financial Impact On Family/Friends?

9. 11-9 Private Placement  Formalized Method For Obtaining Funds From Private Investors  Regulation D- Governs Private Offerings  Broad Provision To Simplify  Defines Private Offering  Specific Operating Rules

10. 11-10 Commercial Banks  Bank Loans- Asset Based  Accounts Receivable  Inventory  Equipment  Real Estate  Cash Flow Financing  Installment  Straight Commercial  Long-Term  Character

11. 11-11 Lending Decisions  Based On Quantifiable Information & Subjective Judgment  Five “C’s” 1.Character4. Collateral 2.Capacity5. Conditions 3.Capital  Review Financial Statements  Review Projections = Reality?

12. 11-12 Lending Questions  Does Entrepreneur Expect To Be Carried By Loan?  Is Entrepreneur Committed To Spend Effort To Succeed?  Business Have Unique Advantage?  Downside Risks?  Protection Against Disasters?

13. 11-13 Bank “Shopping” Process 1.Complete Business Plan & Application 2.Evaluate Several Alternative Banks 3.Select One With Positive Experience in Business Area 4.Set Appointment 5.Present Case/Plan 6.Borrow Maximum Amount Possible

14. 11-14 SBA Financing  When Entrepreneur Doesn’t Have:  Track Record  Assets  SBA-Guarantee For:  Working Capital  Machinery/Equipment  Furniture/Fixtures  Land/Building  Leasehold Improvements  Debt Refinancing

15. 11-15 SBA Conditions  Business Cash Flow  Five “C’s”- 20%+ Ownership Requires Personal Guarantee  Eligibility:  Size  Type Of Business  Use Of Proceeds  Availability Of Funds From Other Sources

16. 11-16 SBA 7(a) Loan  Up To $2 Million- SBA Exposure No More Than $1 Million  Interest Rate Negotiated & Pegged To Prime Rate  Guarantee 85% On Loan < $150,000  Guarantee 75% On Loan $150,000 To $1 Million

17. 11-17 Other SBA Programs  504 Loan Program- Fixed Rate  Acquire Machinery, Equipment, Real Estate  Expand/Modernize  <$1 Million  Microloan- 7(m)  Short-Term < $35,000  Working Capital, Inventory, Supplies, Furniture, Fixtures, Machinery, Equipment  Not For Existing Debt

18. 11-18 R & D Limited Partnerships  Tax Sheltered Money For Developing A Technology- No Guarantee  Elements: 1.Contract 2.Sponsoring Company- General Partner 3.Limited Partnership- Limited Liability  Useful When:  High Risk  Significant Expense

19. 11-19 R & D Contract Features 1)Loss Liability Borne By Limited Partners 2)Tax Advantages To Limited Partnership & Sponsoring Company 3)Benefits/Costs a)Provides Funds With Minimum Equity Dilution b)Expensive To Establish

20. 11-20 Government (SBIR) Grants  Phase I- Up To $100,000 For 6 Months Feasibility Study  Phase II- Principal R & D Effort, Up to $750,000 For 24 Months, Develop Prototype Products/Services  Phase III- Commercialization, No SBIR Funding

21. 11-21 R & D Limited Liability Stages I.Funding A.Contract Established- Terms/Conditions Of Ownership B.Money Invested II.Development- Research Performed III.Exit- Reap Benefits A.Equity Partnership B.Royalty Partnership C.Joint Venture