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CHAPTER 11 LECTURE NOTES

1

Evaluate the choice between debt financing and equity financing.

PPT 11-1

Chapter 11

Finding Sources of Financing

PPT 11-2

Chapter 11

Learning Objectives          

PPT 11-3/TM 11-1

Three Basic Types of

Financing

[Acetate 11-1]

PPT 11-4/TM 11-2

Tradeoffs in Selecting

Between Debt and Equity

[Acetate 11-2]

A.    Debt or equity financing?

·         Initially, provide an overview of the chapter by reminding students of the beginning questions that must be answered about financing a small company.  How much financing will be needed?  What type of financing might be available?

·         Review the three basic types of financing: spontaneous financing, profit retention, and external financing.

·         Discuss the tradeoffs in selecting between debt and equity.

1.       Potential profitability—using more debt may increase profitability.

2.       Financial risk—obligations to service debt yields increased firm risk.

3.       Voting control—equity financing requires some loss of owner control.

2

Describe various sources of financing available to small firms.

PPT 11-5/TM 11-3

Sources of Funds

[Acetate 11-3]

B.     Sources of financing

·       Point out to students that the funds invested in the business (owners’ equity                         and creditor capital) are represented on the right-hand side of the balance sheet.

·       Involve students in a discussion of the characteristics and the pros and cons of each of                     the financing sources.

PPT 11-6/TM 11-4

Individuals as Sources
of Funds

        1.     Individual Investors

                a.      Personal savings—the most frequently used source of equity in startups.

                b.     Friends and relatives—convenient, but potentially stressful

                c.      Other individual investors (informal capital, business angels)

PPT 11-7/TM 11-5

Business Suppliers and

Asset-Based Lenders as

Sources of Funds

        2.     Business suppliers and asset-based lenders

                a.      Trade credit (accounts payable)—very short-term

b.        Equipment loans and leases

·          Installment loans on equipment normally run 3-5 years.

·          The chapter lists three reasons for the rising popularity of leases.

                c.      Asset-based lending—credit secured by receivables, inventory, etc.

PPT 11-8/TM 11-6

Commercial Banks as

Sources of Funds

        3.     Commercial banks

a.         Types of bank loans

·         Lines of credit

·         Term loans

·         Mortgages

b.        Understanding a banker’s perspective

·         The two concerns of bankers—potential for returns, risk of default

PPT 11-9/TM 11-7

The Five Cs of Credit

[Acetate 11-4]

PPT 11-10/TM 11-8

Financial Information

Required for a Bank Loan

·         The five Cs of credit (character of the borrower, capacity to repay, capital             invested by borrower, condition of the industry/economy, collateral)

·         Cultivating a relationship with a banker

·         Key questions a banker needs answered before making a loan

·         Financial information a banker expects a borrower to provide

c.        Selecting a banker

d.       Negotiating the loan

·          Interest rate

·          Loan maturity date

·          Repayment schedule

·          Loan covenants (e.g., timely and complete information, salary                          limitations, key ratios, personal guarantees)

PPT 11-11/TM 11-9

Government-Sponsored

Agencies as Sources

of Funds

PPT 11-12

Other Sources

of Financing

        4.     Government-sponsored programs and agencies

                a.      Federal assistance

·          Small Business Administration (SBA) loans

·          Small business investment companies (SBICs)

·          Small Business Innovative Research (SBIR) program

b.     State and local government assistance

        5.     Other sources of financing

a.     Community-based financial institutions—for low-income communities

b.     Large corporations—investing for future partnerships

c.     Venture capital firms

d.     Stock sales

·          Private placement—stock sold to selected individuals

·          Public sale—stock made available to the general public

3

Explain how the Internet is being used to find sources of financing.

PPT 11-13/TM 11-10

Internet Services That

Match Entrepreneurs

and Investors

C.      Using the Internet to raise financing

·          Possible, but not easy

·          Entrepreneur-investor matching services (Wit Capital, Quicken Business CashFinder, ACE-Net, PriCap, NVST, America’s Business funding Directory)

4

Discuss the most important factors in the process of obtaining startup financing.

PPT 11-14/TM 11-11

Amar Bhide’s

Recommendations

for Startup Businesses

D.    Keeping the right perspective

·       Point out the recommendations offered by Bhide.

·       Ask students whether they agree or disagree with these recommendations.