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Business Finance Basics
Equity Financing Debt Financing Finances and Firm Stage Empirical Data on Use of Debt amp Equity Business Finance Examples
1
Equity Financing
Definition of equity Governance and financial rights Financial return dividends and capital gains Forms of equity preferred stock common stock
partnership interest ldquoproject equityrdquo Key equity terms Company valuation Voting rights amp board representation Registration rights Anti-dilution covenants
2
Key Formulas Equity Finance
Company valuation Discounted cash flow Value = Σ CFi (1+r)i
Priceearnings ratio Value = PER stabilized earnings
Private investorrsquos ownership share of ownership = investment(pre-investment
company value + investment)
Company valuation is inexact Valuation and ownership share is negotiated
3
Debt Financing
Definition of debt Financial terms Principal Interest rate Loan term or maturity Amortization period Non-financial terms Collateral and security position Guarantees Financial covenants Debt service coverage ratio (cash flowP + I) Loan-to-value ratio (loan prin appraised value)
4
Selected Types of Debt
Trade credit Lines of credits Construction loans Equipment leases Term loans Mini-perm loans Long-term mortgage loans Bonds
5
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Equity Financing
Definition of equity Governance and financial rights Financial return dividends and capital gains Forms of equity preferred stock common stock
partnership interest ldquoproject equityrdquo Key equity terms Company valuation Voting rights amp board representation Registration rights Anti-dilution covenants
2
Key Formulas Equity Finance
Company valuation Discounted cash flow Value = Σ CFi (1+r)i
Priceearnings ratio Value = PER stabilized earnings
Private investorrsquos ownership share of ownership = investment(pre-investment
company value + investment)
Company valuation is inexact Valuation and ownership share is negotiated
3
Debt Financing
Definition of debt Financial terms Principal Interest rate Loan term or maturity Amortization period Non-financial terms Collateral and security position Guarantees Financial covenants Debt service coverage ratio (cash flowP + I) Loan-to-value ratio (loan prin appraised value)
4
Selected Types of Debt
Trade credit Lines of credits Construction loans Equipment leases Term loans Mini-perm loans Long-term mortgage loans Bonds
5
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Key Formulas Equity Finance
Company valuation Discounted cash flow Value = Σ CFi (1+r)i
Priceearnings ratio Value = PER stabilized earnings
Private investorrsquos ownership share of ownership = investment(pre-investment
company value + investment)
Company valuation is inexact Valuation and ownership share is negotiated
3
Debt Financing
Definition of debt Financial terms Principal Interest rate Loan term or maturity Amortization period Non-financial terms Collateral and security position Guarantees Financial covenants Debt service coverage ratio (cash flowP + I) Loan-to-value ratio (loan prin appraised value)
4
Selected Types of Debt
Trade credit Lines of credits Construction loans Equipment leases Term loans Mini-perm loans Long-term mortgage loans Bonds
5
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Debt Financing
Definition of debt Financial terms Principal Interest rate Loan term or maturity Amortization period Non-financial terms Collateral and security position Guarantees Financial covenants Debt service coverage ratio (cash flowP + I) Loan-to-value ratio (loan prin appraised value)
4
Selected Types of Debt
Trade credit Lines of credits Construction loans Equipment leases Term loans Mini-perm loans Long-term mortgage loans Bonds
5
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Selected Types of Debt
Trade credit Lines of credits Construction loans Equipment leases Term loans Mini-perm loans Long-term mortgage loans Bonds
5
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
6
Annual Returns to Stocks and Bonds 1928-2014
2500
2000
1500
1000
500
000
1153
528
1990
780
Average Return Standard Deviation
SampP 500 Stock Index US Treasury Bonds
Data source httpwwwsternnyuedu~adamodarpcdatasetshistretSPxls
6
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Debt Examples
Figure 2-1 Comparison of Principal Balance Over Time for Interest Only and Amortizing Loans
$100000000
$90000000
$40000000
$30000000
$20000000
$10000000
$000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Number of Months
$80000000
$70000000
$60000000
$50000000
Interest Only
Partial Amortization
Full Amortization
Loan Pr incipal Balance
7
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Average Permanent Loan Terms 3rd Quarter 2016
Investor Survey RealtyRatescom
Loan Terms
Industrial Office Lodging Restaurant Retail
Interest Rate 492 518 562 657 506
DSCR 149 170 157 166 141
LTV 70 73 67 64 71
Amortization (years)
25 30 22 21 25
Term (years) 1146 80 78 745 620
8
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Key Formulas Debt Financing
Principal amount from monthly cash flow pv (monthly interest rate (i) of months in
amortization period (n) monthly cash flow for debt service (cf))
Monthly payment for a loan amount Pmt(monthly interest rate of months in
amortization period (n) loan principal amount)
Outstanding principal balance pv (monthly i n left in amortization period monthly
loan payment )
9
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Small Firm Capital Sources Capital Source All Small
Businesses Small Firms lt 20 workers sales lt $1 mm
Small Firms gt 20 workers sales gt $1 mm
Principal Owner Equity 3133 4453 2722
Angel Finance 359 na na
Venture Capital 185 na na
Other Equity 1286 na na
Total Equity 4963 5600 4767
Commercial Banks 1875 1488 1994
Finance Companies 491 308 547
Other Fin Institution 300 353 283
Trade Credit 1578 1181 1701
Principal Owner Debt 410 559 363
Other Sources 383 511 345
Total Debt 5037 4400 5233
10
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Seed Stage 1 to 3 years Very small size Pre-growth Limited finance needs Few assets No revenue
Start-up Stage 1 to 5 years Small size Slow to moderate growth More finance needs Some assets Unpredictable earnings
Maturity Stage 10 + years Largest size Modest growth Renewal investment needs Sizeable assets may be outdated Earnings predictable
Growth Stage 5 to 10 years Medium size Rapid growth High investment needs Sizeable assets Some earnings predictability
Firm Stages
11
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Capital Sources by Firm Age
Capital Source 0-2 Years 3-4 Years 5-25 Years 25+ Years
Principal Owner Equity 1961 1737 3194 3542
Total Equity 4790 3937 4800 5650
Commercial Banks 1566 3084 1786 1725
Finance Companies 833 251 585 328
Other Fin Institution 384 236 287 338
Trade Credit 1340 1342 1710 1386
Principal Owner Debt 602 619 391 368
Other Sources 485 531 441 205
Total Debt 5210 6063 5200 3350
12
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Empirical Data and Growth Stage Theory
High reliance on debt finance (gt 50) at start-up and early stages Heavy use of external institutional debt (40) at
start-up Growth in principle owner equity and total equity
after 4 years Ownerrsquos personal assets are important to raising
external capital
13
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Small Business Credit Use 2009 to 2011
Type of Credit 2009 () 2010 () 2011()
Line of Credit (all) 456 468 454
Line of Credit (lt4 yrs) 306 375 260
Business Loan (all) 359 314 291
Business Loan (lt4 yrs) 204 362 145
Bus Credit Card (all) 638 575 588
Bus Credit Card (lt4 yrs) No data 493 518
Trade Credit (all) No data 578 471
Trade Credit (lt4 yrs) No data 428 438
BOGFRS Availability of Credit to Small Businesses April 201214
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Small Business Credit Sources
Courtesy of Karen G Mills and Brayden McCarthy Used with permission
15
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Business Finance Example 1
A neighborhood hardware store is planning to add an equipment rental service to its business It needs $30000 to $40000 to buy the rental equipment and expects rental sales of $3000 to $3500 per month It rents its building with ten years remaining on its lease and has had stable total sales over the past several years
16
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
Business Example 2
The owner of a small furniture manufacturer is retiring and is interested in selling the business to her fifteen employees The firm owns all its building and equipment and has inventory of wood finished products it values at $50000 and an existing mortgage loan with a $100000 balance The owner is asking $1000000 for the business and all its assets
17
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms
MIT OpenCourseWare httpsocwmitedu
11437 Financing Economic Development Fall 2016
For information about citing these materials or our Terms of Use visit httpsocwmiteduterms