Upon completion of this chapter, you will be able to:

1. Explain the differences in the three types of capital small businesses require: fixed, working, and growth.

    

2. Describe the differences in equity capital and debt capital and the advantages and disadvantages of each.

    

3. Discuss the various sources of equity capital available to entrepreneurs, including personal savings, friends and relatives, angels, partners, corporations, venture capital, and public stock offerings.

    

4. Describe the process of "going public," as well as its advantages and disadvantages and the various simplified registrations and exemptions from registration available to small businesses wanting to sell securities to investors.

    

5. Describe the various sources of debt capital and the advantages and disadvantages of each: banks, asset-based lenders, vendors (trade credit), equipment suppliers, commercial finance companies, savings and loan associations, stock brokers, insurance companies, credit unions, bonds, private placements, Small Business Investment Companies (SBICs), and Small Business Lending Companies (SBLCs).

    

6. Identify the various federal loan programs aimed at small businesses.

    

7. Describe the various loan programs available from the Small Business Administration.

    

8. Discuss valuable methods of financing growth and expansion internally.

1. Explain the differences in the three types of capital small businesses require: fixed, working, and growth.
   • Capital is any form of wealth employed to produce more wealth. Three forms of capital are commonly identified: fixed capital, working capital, and growth capital.
   • Fixed capital is used to purchase a company's permanent or fixed assets; working capital represents the business's temporary funds, and is used to support the business's normal short-term operations; growth capital requirements surface when an existing business is expanding or changing its primary direction.

2. Describe the differences in equity capital and debt capital and the advantages and disadvantages of each.
   • Equity financing represents the personal investment of the owner (or owners), and it offers the advantage of not having to be repaid with interest.
   • Debt capital is the financing that a small business owner has borrowed and must repay with interest. It does not require entrepreneurs to give up ownership in their companies.

3. Describe the various sources of equity capital available to entrepreneurs, including personal savings, friends and relatives, angels, partners, corporations, venture capital, and public stock offerings.
   • The most common source of financing a business is the owner's personal savings. After emptying their own pockets, the next place entrepreneurs turn for capital is family members and friends. Angels are private investors who not only invest their money in small companies, but they also offer valuable advice and counsel to them. Some business owners have success financing their companies by taking on limited partners as investors or by forming an alliance with a corporation, often a customer or a supplier. Venture capital companies are for-profit, professional investors looking for fast-growing companies in "hot" industries. When screening prospects, venture capital firms look for competent management, a competitive edge, a growth industry, and important intangibles that will make a business successful. Some owners choose to attract capital by taking their companies public, which requires registering the public offering with the SEC.

4. Describe the process of "going public," as well as its advantages and disadvantages and the various simplified registrations and exemptions from registration available to small businesses wanting to sell securities to investors.
   • Going public involves: 1. choosing the underwriter, 2. negotiating a letter of intent, 3. preparing the registration statement, 4. file with the SEC, and 5. meet state requirements.
   • Going public offers the advantages of raising large amounts of capital, improved access to future financing, improved corporate image, and gaining listing on a stock exchange. The disadvantages include dilution of the founder's ownership, loss of privacy, reporting to the SEC, filing expenses, and accountability to shareholders.
   • Rather than go through the complete registration process, some companies use one of the simplified registration options and exemptions available to small companies: Regulation S-B, Regulation D (Rule 504) Small Company Offering Registration (SCOR), Regulation D (Rule 505, and Rule 506) Private Placements, Section 4(6), Rule 147, Regulation A, direct stock offerings, and foreign stock markets.

5. Describe the various sources of debt capital and the advantages and disadvantages of each: banks, asset-based lenders, vendors (trade credit), equipment suppliers, commercial finance companies, savings and loan associations, stock brokers, insurance companies, credit unions, bonds, private placements, Small Business Investment Companies (SBICs), and Small Business Lending Companies (SBLCs).
   • Commercial banks offer the greatest variety of loans, although they are conservative lenders. Typical short-term bank loans include commercial loans, lines of credit, discounting accounts receivable, inventory financing, and floor planning.
   • Trade credit is used extensively by small businesses as a source of financing. Vendors and suppliers commonly finance sales to businesses for 30, 60, or even 90 days.
   • Equipment suppliers offer small businesses financing similar to trade credit, but with slightly different terms.
   • Commercial finance companies offer many of the same types of loans that banks do, but they are more risk oriented in their lending practices. They emphasize accounts receivable financing and inventory loans.
   • Savings and loan associations specialize in loans to purchase real property - commercial and industrial mortgages - for up to 30 years.
   • Stock-brokerage houses offer loans to prospective entrepreneurs at lower interest rates than banks because they have high quality, liquid collateral - stocks and bonds in the borrower's portfolio.
   • Insurance companies provide financing through policy loans and mortgage loans. Policy loans are extended to the owner against the cash surrender value of insurance policies. Mortgage loans are made for large amounts and are based on the value of the land being purchased.
   • Small Business Investment Companies are privately owned companies licensed and regulated by the SBA that qualify for SBA loans to be invested in or loaned to small businesses.
   • Small Business Lending Companies make only intermediate and long-term loans that are guaranteed by the SBA.

6. Identify the various federal loan programs aimed at small businesses.
   • The Economic Development Administration, a branch of the Commerce Department, makes loan guarantees to create and expand small businesses in economically depressed areas.
   • The Department of Housing and Urban Development extends grants (such as Community Development Block Grants) to cities that, in turn, lend and grant money to small businesses in an attempt to strengthen the local economy.
   • The Department of Agriculture’s Rural Business-Cooperative Service loan program is designed to create nonfarm employment opportunities in rural areas through loans and loan guarantees.
   • Local development companies receive loans and from banks and guarantees from the SBA and then make loans to small businesses for fixed assets. The goal is to stimulate economic growth and to create jobs in the local communities.
   • The Small Business Innovation Research Program involves 11 federal agencies that award cash grants or long-term contracts to small companies wanting to initiate or to expand their research and development (R&D) efforts.
   • The Small Business Technology Transfer Program allows researchers at universities, federally funded R&D centers, and non-profit research institutions to join forces with small businesses and develop commercially promising ideas.

7. Describe the various loan programs available from the Small Business Administration.
   • Almost all SBA loan activity is in the form of loan guarantees rather than direct loans. Popular SBA programs include: LowDoc program, the SBAExpress program, the 7(A) loan guaranty program, the CAPLine program, the Export Working Capital program, the Section 504 Certified Development Company program, the Microloan program, the Prequalification Loan Program, the Disaster Loan program, and the 8(a) program.
   • Many state and local loan and development programs such as Capital Access Programs and Revolving Loan Funds complement those sponsored by federal agencies.

8. Discuss valuable methods of financing growth and expansion internally.
   • Small business owners may also look inside their firms for capital. By factoring accounts receivable, leasing equipment instead of buying it, and by minimizing costs, owners can stretch their supplies of capital.

Answer all of the following questions:

1.  What is capital?  List and describe the three types of capital a small business needs for its operations

2.  Define equity financing.  What advantage does it offer over debt financing?

3.  What is the most common source of equity funds in a typical small business?  If you lack sufficient equity capital to invent in a business, what options are available for raising it?

4.  What is an angel investor?  How can you locate potential angels to invent into your business?

5.  Summarize the major exemptions and simplified registrations available to small companies wanting to make public offering of their stock.

6.  What is trade credit?  How important is it as a source of debt financing to small firms?

7.   Briefly describe the loan programs offered by the following:

• Economic Development Administration
• Department of Housing and Urban Development
• Department of Agriculture
• Local Development companies

• Accel for Entrepreneurs
  http://www.accel.com/entrepreneurs/index.html#research
  
   
• Accel Partners, a venture capital firm
  http://www.accel.com/
  
   
• ACCION International, The World's Leading Microlending Organization
  http://www.accion.org/main.asp
  
   
• ACE-NET, The Angel Capital Electronic Network
  https://ace-net.sr.unh.edu/
  
   
• Alliance Technology Ventures: Resources for Entrepreneurs
  http://www.atv.com/04resources/04.resources.html
  
   
• American Entrepreneurs for Economic Growth
  http://www.aeeg.org/
  
   
• BusinessFinance.com, America's Business Funding Directory
  http://www.businessfinance.com/
  
   
• BrainBank's Finance Index
  http://www.cftech.com/BrainBank/FINANCE/FinanceIndex.html
  
   
• MoreBusiness.com Financing Guide Table of Contents
  http://www.morebusiness.com/running_your_business/financing/
  
   
• California Trade and Commerce Agency: Small Business Financing
  http://commerce.ca.gov/business/small/financial/sb_scor.html
  
   
• The Capital Network
  http://www.thecapitalnetwork.com/
  
   
• PricewaterhouseCoopers Money Tree Report, a survey of venture capital firms
  http://www.pwcmoneytree.com/
  
   
• Credit Union Times
  http://www.cutimes.com/
  
   
• Direct Stock Market
  http://www.dsm.com/index.htm
  
   
• Economic Development Administration
  http://www.doc.gov/eda/
  
   
• Entrepreneur Magazine Money and Finance
  http://www.entrepreneurmag.com/Your_Business/YB_Node/0,4507,367-----,00.html
  
   
• Envista's Private Equity Links
  http://www.privateequity.com/
  
   
• European Stock Market Indexes Web Site
  http://www.ihs.ac.at/fin/finix/direct.html
  
   
• Garage.com, We start startups
  http://www.garage.com/
  
   
• Colorado SBDC: Guide to Small Business Loans
  http://www.uccs.edu/~sbdc/loan.html
  
   
• Hoover's IPO (Initial Public Offering) Central
  http://www.ipocentral.com/
  
   
• Idea Cafe's "Financing Your Business"
  http://www.IdeaCafe.com/getmoney/FINANCING.shtml
  
   
• 4IPO.com
  http://www.4ipo.com/
  
   
• IPO.com
  http://www.ipo.com/
  
   
• IPO Data
  http://www.ipodata.com/
  
   
• IPO Home
  http://www.ipohome.com/default.asp
  
   
• IPO Monitor
  http://www.ipomonitor.com/
  
   
• IPO Spotlight Report
  http://www.ipospotlight.com/
  
   
• London Stock Exchange: Alternative Investment Market (AIM)
  http://www.londonstockexchange.com/
  
   
• MoneyHunter
  http://www.moneyhunter.com/
  
   
• National Association of Small Business Investment Companies
  http://www.nasbic.org/
  
   
• National Association of Seed and Venture Funds
  http://www.nasvf.org/
  
   
• National Venture Capital Association
  http://www.nvca.org/
  
   
• Online Small Business Workshop: Alternative Sources of Financing
  http://www.sb.gov.bc.ca/smallbus/workshop/alter.html
  
   
• Online Small Business Workshop: Equity Financing
  http://www.sb.gov.bc.ca/smallbus/workshop/equity.html
  
   
• Online Small Business Workshop: Financing Your Business
  http://www.sb.gov.bc.ca/smallbus/workshop/finance.html
  
   
• Online Small Business Workshop: Long Term Debt Financing
  http://www.sb.gov.bc.ca/smallbus/workshop/longterm.html
  
   
• Online Small Business Workshop: Short Term Debt Financing
  http://www.sb.gov.bc.ca/smallbus/workshop/shorterm.html
  
   
• Q & A: Small Business and the SEC
  http://www.sec.gov/smbus/qasbsec.htm
  
   
• Red Herring Online
  http://www.herring.com/
  
   
• SCOR-Net, Home of the Direct Stock Market's Small Corporate Offering Registration (SCOR) Network
  http://www.scor-net.com/
  
   
• SCOR Report
  http://www.scor-report.com/
  
   
• Securities and Exchange Commission
  http://www.sec.gov/
  
   
• Small Business Administration: Financing Your Business
  http://www.sba.gov/financing/
  
   
• Small Business Administration: SBIC Venture Capital
  http://www.sba.gov/INV/
  
   
• Small Business Administration's Office of Advocacy ACE-NET, Angel Capital Electronic Network
  http://www.sba.gov/ADVO/acenet.html
  
   
• Small Business Financing Resources
  http://www.d.umn.edu/~jjacobs1/fr1a.html
  
   
• NASA: Small Business Financing: Some Guidelines
  http://sbir.gsfc.nasa.gov/SBIR/Financing.htm
  
   
• Small Business Innovation Research Program
  http://www.sba.gov/sbir/sbir.html
  
   
• Sources of Capital
  http://www.dced.state.ut.us/NAV/library/bizutah/capital.htm
  
   
• Student.Com Campus: Staking the Students
  http://www.student.com/97/10/07/venturecapital/
  
   
• Trickle Up Program
  http://www.trickleup.org/
  
   
• Venture Associates: Private Offerings
  http://www.venturea.com/pvt.htm
  
   
• Venture Capital Institute
  http://www.vcinstitute.org/
  
   
• VCapital
  http://www.vcapital.com/
  
   
• VFinance
  http://www.vfinance.com/
  
   
• VentureOne
  http://www.ventureone.com/index.html
  
   
• The Venture Site
  http://www.venturesite.co.uk/
  
   
• 28 Ways to Finance Your Business
  http://www.hawaiian.com/vpa/
  
   
• Initial Public Offerings
  http://entrepreneurs.miningco.com/smallbusiness/entrepreneurs/msubgetmi.htm
  
   
• IPO Maven
  http://www.ipomaven.com
  
   
• Edgar Online IPO Express
  http://www.edgar-online.com/ipoexpress/
  
   
• PriceWaterhouseCoopers Entrepreneur Resource Guide: IPOs
  http://www.pwcerc.com/sourcing.asp
  
   
• NetRoadshow
  http://www.netroadshow.com
  
   
• Venture Economics
  http://www.ventureeconomics.com/
  
   
• Drew Field Direct Public Offerings
  http://www.dfdpo.com/
  
   
• Screen Test for a Direct Public Offering Drew Field Direct Public Offerings
  http://www.dfdpo.com/screen.htm
  
   
• Business Finance The Largest Network of Business Capital Search Engines
  http://www.businessfinance.com
  
   
• Loanbiz.com Business Loan Information
  http://www.loanbiz.com/business.htm
  
   
• The Elevator Home of the "Elevator Pitch"
  http://www.theelevator.com/
  
   
• CFOL.com The World's Largest Business Finance Search Engine
  http://www.cfol.com/
  
   
• Live Capital - Business Loans, Financing, and Leasing
  http://www.livecapital.com/
  
   
• American Express, Small Business Products
  http://www.americanexpress.com/homepage/smallbusiness.shtml?pers_home=sbstab
  
   
• AngelMoney.com
  http://www.angelmoney.com
  
   
• BankRate.com
  http://www.bankrate.com/brm/default.asp
  
   
• Business Angels International
  http://www.equityinternational.com
  
   
• Businesslenders.com
  http://www.businesslenders.com/
  
   
• The Capital Network
  http://www.thecapitalnetwork.com
  
   
• The Colorado Capital Alliance
  http://www.angelcapital.org
  
   
• The Capital Connection
  http://www.capitalconnection.com
  
   
• EarlyBirdCapital.com, Redefining Venture Investing
  http://www.earlybirdcapital.com/
  
   
• GE Capital, Small Business Solutions
  http://www.gesmallbusiness.com/home.jsp
  
   
• Seraph Capital Forum
  http://www.seraphcapital.com
  
   
• Women First Capital Fund
  http://www.womenfirstcapital.com
  
   
• WomenAngels.net
  http://www.womenangels.net
  
   
• Koldoon, Technology Investment Wizard
  http://www.koldoon.com/
  
   
• PriceWaterhouseCoopers MoneyTree Survey
  http://www.pwcmoneytree.com/
  
   
• Venture Capital Resource Library
  http://www.vfinance.com/
  
   
• Investor's Network
  http://www.investorsnet.com/venture/index.html
  
   
• Capital Connection: Entrepreneur's Resource for Finance
  http://www.capital-connection.com/
  
   
• National Association of Venture Forums
  http://www.ventureforums.org/
  
   
• Commercial Finance Association
  http://www.cfa.com/
  
   
• LiveCapital, an on-line loan center for entrepreneurs
  http://www.livecapital.com
  
   
• Credit Union National Association
  http://www.cuna.org/data/index.html
  
   
• World Council of Credit Unions
  http://www.woccu.org/
  
   
• Credit Unions Online
  http://www.creditunionsonline.com/
  
   
• National Association of Small Business Investment Companies
  http://www.nasbic.org/
  
   
• Small Business Innovation Research Program Resource Center
  http://www.zyn.com/
  
   
• National Association of Development Companies
  http://NADCO.org/
  
   
• Corporation for Enterprise Development
  http://www.cfed.org/