1. Financing Your Business
Business Management

2. Today’s Objectives
Explore differences among various sources of capital.
Identify the cost of operations.

3. Methods of Obtaining Capital
Equity Capital
Debt Capital

4. Owner Capital The owner(s) personal contributions to the business
May come from personal savings or personal loans
Small businesses rely heavily on owner capital
Also known as equity capital

5. Retained Earnings
Also a type of equity capital because business profits belong to the owner(s)
Business profits saved for use by the business in the future

6. Debt Capital Money that others loan to a business
Also known as creditor capital
Banks & other lenders usually will NOT lend to a business unless the equity capital exceeds the debt capital

7. Obtaining Equity Capital
Remember those business structures?

8. Sole Proprietorship Invest more personal funds
Sell personal assets to raise $$$
Mortgage personal property
Assets used as securities are at risk if the business fails.
Other personal assets at risk
Change business structure
Partnership
Corporation

9. Partnership
Partners usually invest personal resources in the business in order to balance/share risk.
Not mandatory for new partners
A formal partnership agreement identifies the financial contributions of each partner and how profits will be shared.
If the assets of one partner are not enough to cover business debts, assets from other partners can be taken.
Owner gives up individual control over management and decision-making.

10. Corporation
Can raise capital quickly because the amount of money invested is much smaller
Stockholders are not involved in day-to-day management of business.
Investors are protected financially.

11. Obtaining Debt Capital

12. Short-Term Debt Capital
Must be repaid within a year
Often 30-, 60-, or 90-day loans
Usually obtained from a bank or other lending institutions

13. Short-Term Debt Capital
Business must supply bank with adequate financial information.
Bank usually obtains a financial report on the business from a credit company.
If the bank considers the business to be a good credit risk, the bank will grant a loan or a line of credit.
Specific amount, set time period
Business owner(s) must sign a promissory note.
Unconditional written promise to pay the lender a certain sum of money at a particular time or on demand

14. Long-Term Debt Capital
Money borrowed for longer than a year
Usually obtained through:
Long-term notes
Bonds

15. Term Loans
Also known as long-term notes; medium- or long-term financing used for business operations or for improving fixed assets
Written for periods from 1 to 15 years … or longer
Significant source of capital for most businesses
Banks / lenders require the principal and interest to be repaid on a regular basis over the life of the note.

16. Bonds
Long-term written promise sold by the business to investors that promises payment of a definite sum of money at a specified time
Business receives the amount of the bond when it is initially sold.
Must pay bondholder the borrowed amount (principal) at the bond’s maturity date
Business pays bondholder interest at a specified rate at certain intervals
Bonds do NOT represent a share of ownership; they are investments.
Bondholders are creditors & have priority claim before stockholders.

17. Obtaining Capital
3 things to consider…

18. Cost of Capital Costly to sell bonds, long-term notes, or issue stock
Must file forms, obtain approval, make agreements, find buyers
Usually only large or highly successful firms even consider stocks/bonds

19. Interest Rates Rates fluctuate monthly, weekly, even daily
Best to borrow when rates are low (cheaper)
When rates are high, businesses usually borrow short-term debts.

20. Influence of Contributors
Short-term creditors usually have no control over management and operations of business.
Long-term credit agreements are tied to asset claims & may impose limitations on those assets.
Partners / stockholders gain a voice in control of business.

21. Sources of Capital
Where do you get the money?

22. Sources of Capital Banks - most popular source of outside capital
Small Loan Companies - firms that lend money to “higher risk” business and individuals
Venture Capitalists
People or companies that lend large sums of money to promising new or growing businesses
Usually ask for a percentage of ownership rights in the company
Demand a carefully developed business plan that shows high potential for success

23. Sources of Capital
Commercial Credit Companies - lend money on current assets, such as accounts receivable
Sales Finance Companies - used primarily when installment sales are involved
Insurance Companies - portions of funds collected from policy holders may be loaned to firms
Individual Investors / Investment Groups
Pension Funds - retirement funds collected from employees may be loaned to firms

24. Sources of Capital Investment Banking Organizations
Specialize in selling new security issues to the public
Helps a business raise large sums of capital through stocks / bonds
Can assist a rapidly growing, privately held company with IPO
Equipment Manufacturers
Firms that do not lend money, but sell needed equipment on an extended-time payment plan

25. Review! 2 Methods of Obtaining Capital Types of Debt Capital
3 Things to Consider when Obtaining Capital
10 Sources of Capital

26. So how much money do you need?
Physical Location
Cost of Product / Service
Rent / mortgage
Facility maintenance
Utilities
Transportation
Wages & Salaries
Equipment
Supplies
Raw Materials
Inventory