Section 4 From the Business Plan to Funding the

Transcript:Section 4 From the Business Plan to Funding the:
Section 4 From the Business Plan to Funding the Venture Chapter 12 Sources of Capital Debt or Equity Financing Evaluate financing from perspective of debt versus equity, and then whether to use internal or external funds. Debt financing involves an interest-bearing loan, with payment indirectly related to sales and profits – requires collateral. Short-term financing provides working capital and long-term debt may be used to purchase an asset, using the asset as collateral. Called leveraging the firm – more leverage equals more risk. Equity financing requires no collateral and offers investors some form of ownership – the investor shares in the profits. Key factors in choosing include availability of funds, assets of the venture, and interest rates. Usually a combination of financing is used. Internal or External Funds Internally generated funds are the most frequently used. In the startup years, profits are plowed back into the venture. Assets, whenever possible, should be rented, not owned. Extended payments from suppliers is one short-term source of funds. Another is collecting accounts receivable quicker. Evaluate external fund sources by: The length of time the funds are available. Costs involved. The terms of the contract. Self (Personal Funds) Few new ventures begin without personal funds. Least expensive in terms of cost and control. They are essential in attracting outside funding. Often referred to as blood equity, sources include savings, life insurance, or mortgage on a house or car. Outside investors want financial commitment. The percentage of available total assets committed to the venture demonstrates commitment level. Outside investors want all available assets committed. Family and Friends Family and friends provide a small amount of equity funding. The amount may be small but it is relatively easy to obtain. It is a form of equity funding and there is now an ownership position. To avoid problems, present the positive and negative aspects and nature of the risks of the investment. Keep arrangements strictly business – put it in writing. Any loan should specify interest rate and payment schedule. Family members and friends investing in the venture should receive regular financial statements. Carefully consider the impact before accepting funds. Commercial Banks When collateral is available, banks can provide short-term funds. Collateral can be business assets, personal assets or cosigner’s assets. The asset base for loans is usually accounts receivable, inventory, equipment, or real estate. A bank can finance up to 80% of the value of accounts