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Topic 10: Sources of Financing: Equity and Debt - Coggle Diagram
Topic 10: Sources of Financing: Equity and Debt
Difference between equity capital and debt capital
Equity Capital:
Represents the personal investment of the owner(s) in the business.
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.
But, the entrepreneur must give up some ownership in the company to outside investors.
Debt capital:
Must be repaid with interest.
Is carried as a liability on the company’s balance sheet.
Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous.
Can be expensive, especially for small companies, because of the risk/return tradeoff.
Sources of Equity Financing
Personal savings
Friends and family members
Crowd funding
Accelerators
Angels
Venture capital companies
Corporate venture capital
Public Stock Sale
Process of "going public"
Initial Public Offering (IPO):
When a company raises capital by selling shares of its stock to the public for the first time.
Characteristics of Successful IPO Candidates
Consistently high growth rates
Scalability
Strong record of earnings
3 to 5 years of audited financial statements that meet or exceed SEC standards
Sound management team with experience and a strong board of directors
Nature of Debt Financing
Debt financing is a popular tool used by entrepreneurs to acquire capital.
Borrowed capital allows entrepreneurs to maintain complete ownership of their businesses, but must be repaid with interest.
Small businesses are considered more risky than corporate customers.
Sources of Debt Capital from Commercial Banks
Immediate & Long-term Loans
Installment Loans
Term Loans
Short-term loans
Home Equity Loans
Commercial Loans
Lines of Credit
Floor Planning
Other methods of Financing
Factoring Accounts Receivable
Leasing
Rollovers as Business Startups (ROBS)
Credit cards
Merchant cash advance
Peer-to-peer lending
Loan brokers