1、 2008 Cengage Learning. All rights reserved.,CHAPTER 11 A Firms Sources of Financing,Developing the New Venture Business Plan,Part 3, 2008 Cengage Learning. All rights reserved.,112,Looking AHEAD,Describe how the nature of a firm affects its financing sources. Evaluate the choice between debt financ
2、ing and equity financing. Identify the typical sources of financing used at the outset of a new venture. Discuss the basic process for acquiring and structuring a bank loan. Explain how business relationships can be used to finance a small firm.,After you have read this chapter, you should be able t
3、o:, 2008 Cengage Learning. All rights reserved.,113,Looking AHEAD (contd),Describe the two types of private equity investors that offer financing to small firms. Distinguish among the different government loan programs available to small companies. Explain when large companies and public stock offer
4、ings can be sources of financing.,After you have read this chapter, you should be able to:, 2008 Cengage Learning. All rights reserved.,114,The Nature of a Firm and Its Financing Sources,Firms economic potential,Owner preferences for debt or equity,Company size and maturity,Factors That Determine Fi
5、nancing,Types of assets, 2008 Cengage Learning. All rights reserved.,115,Debt or Equity Financing?,Tradeoffs Between Debt and Equity,Potential Profitability,Voting Control,Financial Risk, 2008 Cengage Learning. All rights reserved.,116,Tradeoffs Between Debt and Equity,11-1, 2008 Cengage Learning. A
6、ll rights reserved.,117,Debt or Equity Financing? (contd),Return on Assets Rate of return earned on a firms total assets invested, computed as operating income total assets Return on Equity Rate of return earned on the owners equity investment, computed as net income owners equity investment, 2008 C
7、engage Learning. All rights reserved.,118,Debt Versus Equity at the Levine Company,11-2, 2008 Cengage Learning. All rights reserved.,119,Sources of Funds,11-3, 2008 Cengage Learning. All rights reserved.,1110,Startup Financing for Inc. 500 Companies in 2003,11-4,Source: Mike Hofman, “The Big Picture
8、,” Inc., Vol. 25, No. 12 (October 2003), p. 87. Copyright 2003 by Mansuelo Ventures LLC. Reproduced with permission of Mansuelo Ventures LLC in the format Textbook via Copyright Clearance Center., 2008 Cengage Learning. All rights reserved.,1111,Debt or Equity Financing?,Sources Close to Home,Person
9、al Savings,Credit Cards,Family and Friends, 2008 Cengage Learning. All rights reserved.,1112,Sources of Personal Capital for Small Firms,11-5,Source: Republished with permission of Dow Jones Inc. from Staff, “Entrepreneurship Monitor 2002,” Wall Street Journal, August 26, 2003, p. B8; permission con
10、veyed through Copyright Clearance Center, Inc., 2008 Cengage Learning. All rights reserved.,1113,Bank Financing,Types of Loans,Line of Credit Revolving Credit Agreement,Mortgages Chattel Real Estate,Term Loans, 2008 Cengage Learning. All rights reserved.,1114,Understanding a Bankers Perspective,Bank
11、ers Concerns How much the bank will earn on the loan? What is the likelihood that the lender will be able to repay the loan? The Five Cs of Credit Character of the borrower Capacity of the borrower to repay the loan Capital invested in the venture by the borrower Conditions of the industry and econo
12、my Collateral available to secure the loan, 2008 Cengage Learning. All rights reserved.,1115,Questions Lenders Ask,Lenders Questions Do the purpose and amount of the loan make sense, both for the bank and for the borrower? Does the borrower have strong character and reasonable ability? Does the loan
13、 have a certain primary source of repayment? Does the loan have a certain secondary source of repayment? Can the loan be priced profitably to the customer and to the bank, and are this loan and the relationship good for both the customer and the bank? Can the loan be properly structured and document
14、ed?, 2008 Cengage Learning. All rights reserved.,1116,The Bankers Concerns,How much money is needed?,What is the venture going to do with the money?,When and how will the money be paid back?,When will the money be needed?, 2008 Cengage Learning. All rights reserved.,1117,Financial Information Requir
15、ed for a Bank Loan,Three years of the firms historical statements Balance sheets, income statements, and statements of cash flow The firms pro forma financial statements The timing and amounts of the debt repayment included as part of the forecasts Personal financial statements The borrowers persona
16、l net worth (assets debts) and estimated annual income, 2008 Cengage Learning. All rights reserved.,1118,Negotiating a Loan: Interest Rate,Prime Rate Interest rate charged by a commercial bank on loans to its most creditworthy customers LIBOR (London InterBank Offered Rate) Interest rate charged by
17、London banks on loans to other London banks Fixed Interest Rates Interest rate remains the same for the term of the loan Floating Interest Rates Interest rate varies with the changes in the prime rate, 2008 Cengage Learning. All rights reserved.,1119,Negotiating a Loan: Term of the Loan,Loan Maturit
18、y Date Maturity date matched to use of funds Repayment Schedule Equal monthly or annual payments Decreasing monthly or annual payments Loan Covenants Bank-imposed restrictions on a borrower to encourage timely repayment Financial statements Loan use restrictions and salary limits Equity requirements
19、 Personal guarantees by borrower, 2008 Cengage Learning. All rights reserved.,1120,Business Suppliers and Asset-Based Lenders,Trade Credit (Accounts Payable) Supplier-provided financing of inventory to a company, which sets up an account payable for the amount. Short-duration financing (30 days) Amo
20、unt of credit available depends on type of firm and suppliers willingness to extend credit, 2008 Cengage Learning. All rights reserved.,1121,Business Suppliers and Asset-Based Lenders (contd),Equipment Loan and Leases Installment loan (mortgage on equipment) from the seller of machinery purchased by
21、 a business. Equipment leased from a supplier: Frees up cash for other purposes Leaves lines of credit open Provides a hedge against obsolescence, 2008 Cengage Learning. All rights reserved.,1122,Business Suppliers and Asset-Based Lenders (contd),Asset-Based Loan A line of credit secured by working-
22、capital assets Factoring Obtaining cash by selling accounts receivable to another firm. Accounts sold to factor at discount to invoice value. Factor can refuse questionable accounts. Factor charges fees for servicing accounts and for amount advanced to firm prior to collection., 2008 Cengage Learnin
23、g. All rights reserved.,1123,Private Equity Investors,Informal Venture Capital Funds provided by wealthy private individuals (business angels) to high-risk ventures Formal Venture Capitalists Individuals who form limited partnerships for the purpose of raising venture capital from large institutiona
24、l investors The firms expected profits in future years The venture capitalists required rate of return., 2008 Cengage Learning. All rights reserved.,1124,The Government,Small Business Administration (SBA) loans The 7 (a) Guaranty Loan Program SBA guarantees repayment of loan to lender The Certified
25、Development Company (CDC) 504 Loan Program The 7(m) Microloan Program Small Business Investment Companies (SBICs) Small Business Innovative Research (SBIR), 2008 Cengage Learning. All rights reserved.,1125,The Government (contd),State and Local Government Assistance Loan guarantees help lower down p
26、ayment. Focus on enhancing specific industries or facilitating certain community goals. Community-Based Financial Institutions Lenders that provide financing to small businesses in low-income communities for the purpose of encouraging economic development., 2008 Cengage Learning. All rights reserved
27、.,1126,Where Else to Look,Large Corporations Financing and technical assistance to critical suppliers and technology developers Stock Sales Private placement The sale of a firms capital stock to selected individuals Initial public offering (IPO) The issuance of stock that is to be traded in public f
28、inancial markets Places firm under SEC securities regulations, 2008 Cengage Learning. All rights reserved.,1127,Key TERMS,return on assets return on equity line of credit revolving credit agreement term loan chattel mortgage real estate mortgage prime rate LIBOR (London InterBank Offered Rate) ballo
29、on payment loan covenants limited liability accounts payable (trade credit) equipment loan asset-based loan,factoring business angels informal venture capital formal venture capitalists 7(a) Loan Guaranty Program Certified Development Company (CDC) 504 Loan Program 7(m) Microloan Program small business investment companies (SBICs) Small Business Innovative Research (SBIR) Program community-based financial institution private placement initial public offering (IPO),
