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Topic 10: Sources of Financing - Coggle Diagram
Topic 10: Sources
of Financing
Equity Capital
Called risk capital because investors assume the risk of losing their money if the business fails.
Does not have to be repaid with interest like a loan does.
Personal investment of the owner(s) in the business.
Entrepreneur must give up some ownership in the company to outside investors.
Sources of Equity Financing
Accelerators
- provide a small amount of seed capital and a wealth of additional support for start-up companies.
Angels
- wealthy individuals who invest in emerging entrepreneurial companies in exchange for equity (ownership) stakes.
Crowdfunding
- taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialised Web sites and raise money from ordinary people who invest as little as $100.
Venture capital companies
- private, for-profit companies that purchase equity positions in young businesses that they believe have high-growth and high-profit potential.
Friends and family members
- inherent dangers lurk in family/friendly business deals, especially those that flop.
Corporate venture capital
- corporate partners may share marketing and technical expertise.
Personal savings
- bootstrapping.
Public stock sale
- Initial public offering (IPO) - selling shares of its stock to the public for the first time.
Debt Capital
Is carried as a liability on the company's balance sheet.
Can be just as difficult to secure as equity financing, even through sources of debt financing are more numerous.
Must be repaid with interest.
Can be expensive, especially for small companies, because of the risk/return tradeoff.
Characteristics of Successful IPO Candidates
Strong record of earnings
3 to 5 years of audited financial statements that meet or exceed SEC standards
Scalability
Solid position in a rapidly-growth industry (average company age is 10 years)
Consistently high growth rates
Sound management team with experience and a strong board of directors
Steps to Take a Company Public
File with the SEC
Wait to "go effective"
Prepare the registration statement
Road show
Negotiate a letter of intent
Sign underwriting agreement
Choose the underwriter
Meet all state requirements
Sources of Debt Capital from Commercial Banks
Short-term loans:
home equity loans
commercial loans
lines of credit
floor planning
Immediate and Long-term loans:
installment loans
term loans
Non-Bank Sources of Debt Capital
Saving and loan associations
Stockbrokers
Commercial finance companies
Credit unions
Equipment suppliers
Private placements
Vendor financing (trade credit)
Small Business Investment Companies (SBIC)
Asset-based lenders
Other Methods of Financing
Credit cards
Merchant cash advance
- a provider pre-purchases credit and debit card receivables at a discount.
Rollovers as Business Startups (ROBS)
- allows entrepreneurs to use their retirement savings to fund their business start-ups.
Peer-to-peer lending
- web-based platforms that create an online community of lenders who provide funding to creditworthy small businesses.
Leasing
- lease assets rather than buying them to avoid tying up capital.
Loan brokers
- specialise in helping small companies find loans by tapping into a wide network of lenders.
Factoring Accounts Receivable
- selling accounts receivable outright.