© 2005 mark t. schenkel1 mark t. schenkel, ph. d. belmont university financing issues in new...
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© 2005 Mark T. Schenkel 1
Mark T. Schenkel, Ph. D.Belmont University
Financing Issues in New Ventures
Foundations of Entrepreneurship
© 2005 Mark T. Schenkel 2
Overview• Debt Financing- Interest-Bearing Instrument
Requiring Collateral (Asset)
• Equity Financing- Investor Receives Ownership Position
• Internal Financing
• Financing Usually A Combination Of Debt And Equity
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Factors AffectingType Of Financing
1) Availability of Funds
2) Assets of Venture
3) Prevailing Interest Rates
4) Degree of Risk Perceived by Investors
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Sources of External Funds
• Self• Family & Friends• Suppliers & Trade
Credit• Commercial Banks• Government Loan
Programs (SBA)
• R & D Limited Partnerships
• Venture Capital• Private Equity
Placements• Public Equity Offerings• Other Government
Programs (SBIR)
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DEBT FINANCING
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Short-term Debt
• Expected to be paid within one year
• Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.
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Short-term Debt
• Trade debt• SBA• Banks• Asset-based lenders• Factors• “Bootstrapping”
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Long-term Debt
• Beyond one year
• Most often used to fund fixed asset purchases
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Long-term Debt
• Banks: term loans
• Leasing companies
• Real estate lenders
• SBA
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Criteria for Lending by Bankers
1. Ability of the business to generate enough cash flow to easily make interest and principle payments
2. Entrepreneur’s ability to personally pay back the loan if the business fails
3. Assets to serve as collateral
Five “C’s”1. Character 4. Collateral
2. Capacity 5. Conditions
3. Capital
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EQUITY FINANCING
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Sources of Equity Funding
• Funding from the entrepreneur • Family and friends • Strategic partners • Angel investors • Private placement • SBICs • Venture Capitalists
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Internal Funds• Profits• Sale of Assets- Rent Instead Of Purchase• Working Capital Reduction• Extended/Discounted Payment Terms- Suppliers• Accounts Receivable- Speed Up Collection• Reduction of:
– Inventory– Cash– Working Capital Items
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Key Takeaway Points . . .
• Many avenues for financing. Creativity is the key . . . but all stakeholders should win in the process.
• Financing method should “make sense” for type of venture being pursued and goals of entrepreneur. Shop, shop, shop . . .
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Key Takeaway Points . . .
• Funding sources can, will, and in most cases, should vary over time as a venture develops in order to maximize venture performance.
• Just as there are many sources of venture funding, so too are there many sources of business valuation. The complexity of valuation makes subjective judgment a critical factor.
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Looking Ahead . . .
• Tuesday (3/27)– Guest Speaker: Allan Joiner (Sr. Vice
President, First American Financial Holdings)
• Thursday (3/29) & Tuesday (4/3)– Managing Cash Flow Exercise
• Thursday (3/29)– Signed Confidentiality Agreement due