1. © 2005 Mark T. Schenkel1 Mark T. Schenkel, Ph. D. Belmont University Financing Issues in New Ventures Foundations of Entrepreneurship

2. © 2005 Mark T. Schenkel 2 Overview Debt Financing- Interest-Bearing Instrument Requiring Collateral (Asset) Equity Financing- Investor Receives Ownership Position Internal Financing Financing Usually A Combination Of Debt And Equity

3. © 2005 Mark T. Schenkel 3 Factors Affecting Type Of Financing 1)Availability of Funds 2)Assets of Venture 3)Prevailing Interest Rates 4)Degree of Risk Perceived by Investors

4. © 2005 Mark T. Schenkel 4 Sources of External Funds Self Family & Friends Suppliers & Trade Credit Commercial Banks Government Loan Programs (SBA) R & D Limited Partnerships Venture Capital Private Equity Placements Public Equity Offerings Other Government Programs (SBIR)

5. © 2005 Mark T. Schenkel5 DEBT FINANCING

6. © 2005 Mark T. Schenkel 6 Short-term Debt Expected to be paid within one year Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.

7. © 2005 Mark T. Schenkel 7 Short-term Debt Trade debt SBA Banks Asset-based lenders Factors “Bootstrapping”

8. © 2005 Mark T. Schenkel 8 Long-term Debt Beyond one year Most often used to fund fixed asset purchases

9. © 2005 Mark T. Schenkel 9 Long-term Debt Banks: term loans Leasing companies Real estate lenders SBA

10. © 2005 Mark T. Schenkel 10 Criteria for Lending by Bankers 1.Ability of the business to generate enough cash flow to easily make interest and principle payments 2.Entrepreneur’s ability to personally pay back the loan if the business fails 3.Assets to serve as collateral  Five “C’s” 1.Character4. Collateral 2.Capacity5. Conditions 3.Capital

11. © 2005 Mark T. Schenkel11 EQUITY FINANCING

12. © 2005 Mark T. Schenkel 12 Sources of Equity Funding Funding from the entrepreneur Family and friends Strategic partners Angel investors Private placement SBICs Venture Capitalists

13. © 2005 Mark T. Schenkel 13 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

14. © 2005 Mark T. Schenkel 14 Key Takeaway Points... Many avenues for financing. Creativity is the key... but all stakeholders should win in the process. Financing method should “make sense” for type of venture being pursued and goals of entrepreneur. Shop, shop, shop...

15. © 2005 Mark T. Schenkel 15 Key Takeaway Points... Funding sources can, will, and in most cases, should vary over time as a venture develops in order to maximize venture performance. Just as there are many sources of venture funding, so too are there many sources of business valuation. The complexity of valuation makes subjective judgment a critical factor.

16. © 2005 Mark T. Schenkel 16 Looking Ahead... Tuesday (3/27) –Guest Speaker: Allan Joiner (Sr. Vice President, First American Financial Holdings) Thursday (3/29) & Tuesday (4/3) –Managing Cash Flow Exercise Thursday (3/29) –Signed Confidentiality Agreement due