9-1 Introduction

Ch 9 Overview
Sources of Capital
Stock Offerings
Exit Strategies
Exhibit 9-1 Seed Cash Stash
Source: Data from Susan Greco, “A Little Goes a Long Way,” Inc. Magazine, October 2002.
9-1 Introduction
• The entrepreneurial venture requires cash to
operate and grow.
– In the early stages, new ventures require capital
from other sources to survive.
• Successful entrepreneurs learn how to
articulate their venture’s business model
and its market potential— elevator speech.
– The elevator speech is just one of the
important skills that the entrepreneur must
possess to be a successful fund-raiser.
9-2 Sources of Capital
• Two major sources of funds for a business
– Debt capital: Funds obtained through
• Debt capital is categorized into two types: short
term and long term.
– Equity capital: Does not require repayment
• Sources of equity capital include retained earnings.
9-2a Short-Term Debt Financing
• Short-term debt: Used to finance current
operations, with required payback within one year
• Can come from several different sources:
– Friends and family
• Such borrowed funds bring an extra risk
• Money borrowed should be handled like any other loan
– Commercial banks
• They can help with any cash flow problems and can give
sound advice.
• Developing a close relationship with a local banker is a good
• When an entrepreneur needs emergency funds, the banker will
be more willing to help out.
9-2a Short-Term Debt Financing
• Statistics from the U.S. Small Business Administration
indicate that commercial banks lent out micro-loans.
• Bank loans come in many different forms:
Unsecured loans
Secured loans backed by collateral
Line of credit
A revolving credit agreement
Floor planning is another option in bank financing
– Trade credit
• The credit given to a firm by the trade—that is, by the
suppliers that the company deals with.
• Entrepreneur may want to use such terms to encourage clients
to pay their bills in a timely manner.
9-2a Short-Term Debt Financing
– Credit cards
• Some entrepreneurs rely on credit cards to help finance the
early stages of their ventures.
• Using credit cards to finance a business can lead to problems if
the cards are utilized without fiscal discipline.
• The advantages include:
Ease with which they can be obtained
Universally accepted
Convenient to use
Assists the entrepreneur in financial record keeping via monthly
• The disadvantage includes:
Relatively high rate of interest
9-2a Short-Term Debt Financing
– Internal funds management
• The venture should attempt to obtain its needed
funds from internal sources.
• A close review of the balance sheet and accounting
ratios will reveal possible sources of funds that have
been overlooked.
• Entrepreneurs should work hand-in-hand with their
accountant to ensure that funds are not tied up in
noncash assets.
9-2b Long-Term Debt Financing
• Successful companies constantly refocus on their
long-term goals and objectives. There are two
primary sources of long-term debt:
– Term loans
• Most term loans have three- to seven-year terms.
• The business signs a term loan agreement called a promissory
• It requires some form of collateral.
• When determining the interest rate for such loans, the bank
looks at:
The length of time the loan is for
The type of collateral
The firm's credit rating
The general level of market interest
9-2b Long-Term Debt Financing
– SBA loans:
• For a smaller business, the U.S. Small Business
Administration (SBA) can often be a good source of
• The eligibility requirements and credit criteria of the
program are very broad in order to accommodate a
wide range of financing needs.
• To qualify for an SBA guaranty, a small business
must meet the SBA’s criteria.
• The lender must certify that it could not provide
funding on reasonable terms without an SBA
• Most cases, the maximum guaranty is $1 million.
9-2b Long-Term Debt Financing
– Leverage:
• The use of long-term debt to raise needed cash is
sometimes referred to as leverage.
• The borrowed cash acts like a lever to increase the
purchasing power of the owner’s investment.
• It maintains higher rates of return on owners'
• It allows the owners to create a larger firm for the
same investment.
• It also means a continued obligation to service the
debt. Judicious use of leverage can help increase
owners' returns.
9-2c Equity Capital
• Equity capital: Funds invested by the
owners of the venture.
– Five forms of equity capital are:
Retained earnings
Sale of partnerships
Venture capital
Public sale of stock
– Stock certificate
– Authorized stock
– Shares sold—issued stock, and unsold shares—unissued
• See Documents and Document Scanner
9-5 Exit Strategies
• The purpose of a venture’s exit strategy is:
– To outline a method by which the early-stage investors
can realize a tangible return on the capital they
– To suggest a proposed window in time that investors
can tentatively target as their investment horizon.
– There are four basic categories of exit strategies (other
than and IPO) in order of occurrence:
Debt-equity swap

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