Download - Non-Equity Financing for the Company
Non-Equity Financing for the Company
Using FRICTO Framework
Determine how to fund the business
Seek Debt
Use Equity
The Entrepreneurial Funding Problem
Demand for small-business financing is greater than supply
50% of firms begin with less than $5000 in capital
Funded by owner, family members, or friends
Thus most companies start under funded and stay that way
The Entrepreneurial Funding Problem
Equity is hard to find for small businesses
Debt is hard to find (Loans)
Companies requesting funds often are under three years old and considered a risk
Five Stages of Financial Development
Start-up Most difficult period for obtaining funds
Development Stage Expansion Stage Growth Stage Public Offering
Small Firms vs Larger Firms
Small firms (under 100 Employees) 26 % had line of credit 9% had financial leases 6% had mortgage loans 14% had equipment loans 24 % had motor-vehicle loans
Small Firms vs Larger Firms
Larger Firms 60% had a line of credit 30% had financial leases 19% had mortgage loans 29% had equipment loans 26% had motor vehicle loans
Banks
37% of these funds for small firms comes from commercial banks
Other suppliers include Finance companies Leasing companies Other non-financial institutions
Non-institutional Financing
First choice Personal Funds Family and Friends Supplier financing Seller financing Business Incubators Franchises Joint ventures
Personal Resources
Includes Family and Friends
Are the funds sufficient?
Can they withstand the possible loss?
How will loss effect relationships?
Supplier Financing
Supplied through generous payment terms or direct loans.
Non-financial assistance Management Consulting Introduction to potential customers
Seller Financing
Equipment sellers will finance a sale by accepting payments and taking a lien on the property.
Buying a business, seller may want to stay involved and offer a payment plan
Business Incubator
A place that you can rent space to run your business
Utilize the group resources
Share administrative supports and staff
Incubators in PA
Franchising
Agencies that assist with evaluating you for a specific franchise
Purchasing an existing franchise
Franchise Opportunities
Top 500
Joint Venture and Strategic Alliances
Developing a new market Developing a new product or
technology Sharing complimentary technology Accessing a distribution network Sharing in the execution of a
contract Accessing capital
Co-Branding
Two or more companies create an informal partnership
Resort and Airline offer a vacation package
Share of advertising, increase marketability
Non-Governmental Institutional Funding
Commercial Banks
Credit-card Companies
Thrifts
Commercial Financing Companies
Commercial Bank Funding
Credit Card Loans Commercial Banks
Short-term loans Lines of credit Floor plans Construction loans Long-term loans Real-estate loans Letters of credit
Finding The Right Bank
Most people look to their primary bank
Types of banks include Money-center banks Super-regional bank Regional bank Community bank
The Loan Application Process
Explain the business strategies Identification of the borrower Identification of the loan request
and its timing Uses for funds Other sources of funds Cash flow projections Collaterial
Six C’s of Credit
Character Cash Flow Capital Capacity Collateral Credit History
Common Reasons Loans are Denied
Incomplete loan proposal Unsupported cash flow projections Inexperienced Management Ability to repay the loan Unrealistic revenue projections Unrealistic expense projections Underestimated Capital needs Lack of adequate collaterial
After The Loan Is Approved
Commitment Letter Loan Agreement Promissory Note Security Agreement
Loan Agreement
The amount of loan Repayment schedule Restrictive Covenants (2 Kinds) Company’s representation Special Conditions Closing fees Insurance Default conditions How to fix default
Restrictive Covenants
Negative covenants What you can not do without banks
approval
Affirmative covenants Actions the company must take
Promissory Note
Contains Key provisions of the loan Interest rate Term of the loan Repayment schedule When payment is late Default description and remedy
Security Agreement
Details the lender’s interest in a specific piece of collaterial
Also filed with the state
Other Non-Governmental Funding
Thrifts (Savings and Loan)
Better service Better pricing Relaxed credit Specialized in mortgages
Commercial Finance Loans
Easier loan to obtain
Commercial Finance Association
Factoring
Buys the company’s receivables at a reduced price
Recourse Agreement Company must buy back unsold
products Non-recourse Agreement
Products are the property of the factoring agent
Factoring Advantages
Accelerate cash flow
Not dependent on credit of company
Reduce debt need on balance sheet
Reduce staff need to move product
Equipment Leasing
Operating Leasing Lessee can return equipment at any
time with proper notice Lease payments are treated as
operating expense Finance leasing
Can not cancel lease without penalty Show as a liability on Balance sheet
Advantages
Government Financing
SBA (Small Business Administration) Uses Private lenders to manage loans Classified as
Regular – SBA controls approval of the loan Certified – Heavily involved in SBA loans Preferred – Chosen by SBA has among the
best lenders Offers both long term and short term
loans through various programs
SBA Programs
7(a) Guaranteed Loans Good Character, management,
expertise, and commitment Contributing Funds Feasibility plan Investment in the business Collaterial
SBA Programs
Special 7(a) CAPLines Program – Meet short term
and season work capital loans Export Working Capital – Working
capital needs of Business exporter International Trade Loan – Those
involved in international trade DELTA - For small businesses affected
by defense cuts
SBA Programs
MicroLoan Program Focuses on non-profit organizations Loan money is used to lend to other
small businesses Typically small loans up to $35,000
SBA Programs
504 Certified Development Company
Program Loan from a private sector lender No collateral required
Small Business Administration
State and Local Government
Pennsylvania Economic Development
CREDC
SEDA-COG
Harrisburg - Mayor's Economic Development Office