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COMM 320 Final Notes.doc

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COMM 315
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SECTION 4 FINANCING NEW AND GROWING ENTERPRISESTHE IMPORTANCE OF CAPITAL AND PLANNINGraising money has always been a major challenge in the venture creation processfor a startup venture cash is what is needed to gain access to supplies and to purchase inventory and assets growing businesses need cash to pay employees restock inventory and conduct day to day operations Business Stages and Financingthe type of financing entrepreneurs can access is dictated by the stage the business is in and the type of opportunities the company is pursuingstage of businessstartup businesses are traditionally self funded and are more likely to be turned down for bank financing type of opportunities entrepreneurs who are starting or managing a small business that is pursuing s slow growth strategy will often be limited to debt as their main source of capital may also use equity when dealing with small business angels friends or relativesexamples service companies retail operations and food and beverage businesses entrepreneurs who are pursuing a high growth venture are must more likely to use debt and equity to finance their business usually businesses in technology health care or knowledge based industriesStages of Business Developing FundingEarly Stage Financingthe most difficult and costly to obtain most likely sources are personal savings personal credit cards personal loans of the entrepreneur friends and family angel investors and some venture capital seed capital small amount needed to conduct market research and develop the business planstart up with low growth potential personal savings personal lines or credit or credit cards money from friends and family and government programsstart up with high growth potential often financed by angel investors business is not above the radar yet so it is not seen by a venture capitaliststart up funding to get the business running business is operating but is probably not profitable financing is needed for working capital inventory and marketing start up with low growth potential personal savings personal lines of credit or credit cards loan from a chartered bank that is personally guaranteed trade credit money from friends and family government programs retained earningsstart up with high growth potential usually angel investors ExpansionDevelopment Financing personal investment venture capitalist and government programseasier to obtain than earlystage financingventure capitalist plan an active role here1funds are used as working capital to support the initial growth no clear profitability or cash flow yet2major expansion for company wit rapid sales growth breakeven or positive profit levels but still private3bridge financing to prepare company to go public once the concept has been proven and the business is generating positive cash flow the primary sources are commercial loans commercial lines of credit and trade creditAcquisitions and Leveraged Buyout Financing venture capital and bank financingtraditional acquisitions assuming ownership and control of another company direct purchaseleverage buyouts management of a company acquiring company control by buying out the present owners borrowinggoing private some of the ownersmanager of the company buying all the outstanding stock making the company private again 3 Risk Capital Markets informal risk capital market angels best source for 1st stage financingventure capital capital provides some first stage funding but they usually required a minimum capital level of 500000 because of the high costs of evaluating and monitoring a dealPublic Equity Market available only for high potential ventures Debt of Equity FinancingDebt Financing borrowing money usually a loan that has to be repaidrequires that some asset be used as collateral funds borrowed must be paid back with interest if the financing is short term less than 1 year money is used to provide working capital to financing inventory accounts receivable or the operations of the businessrepaid from resulting sales and profits during the yearlong term debt is used to purchase some assets with part of the value of the asset being used as collateral debt does not dilute ownershipdebt does not result in a loss of control requires a monthly payment including interest a pressure on cash flow in the early fragile stage when the best practice is to conserve cashdone on a fixed basis which means that payment is fixed no matter how well the company doesEquity Financing representing ownership in the business raising funding this way means giving up a portion of your ownershipinvestors shares in the profits of the venture as well as any disposition of its assets on a pro rata basis on the percentage of the business owned implies that the investor will take risk along with the entrepreneur so there is no monthly cash outlay which allows the company to conserve cash done on a variable basis where the investor has a large return if the business realizes its upside potential small business owners are hesitant to dilute ownership by taking on equity partners Internal or External FundsInternalcan come from several sources within the company profits sale of assets reduction in working capital extended payment terms and accounts receivable in every new venture the start up years involve putting all the profits back into the venture sale of assets or leasing rather than buying at startup and buying used instead of new some argue that leasing or renting will help conserve cashothers argue that entrepreneurs should buy assets which can be used as collateral short term internal source can be obtained by reducing short term assets inventory cash and other working capital deferring salary and using family who will also defer salaryusing justintime inventoryminimal accounts receivable or get down payment that covers the cost portion of the sale External self family friends commercial banks limited partnerships government and venture capitalists Must be evaluated based on 3 criteria1Length of time the funds are available ex a relative lends the entrepreneur 5000 but then wants it back suddenly without notice for personal reasons2Cost of the funds3Amount of control lost Personal Fundsleast expensive funds in terms of cost and control essential in attracting outside funding especially from banks private investors and venture capitalist outside providers of capital feel that they entrepreneur may not be sufficiently committed to the venture if they do not have any money invested Family and Friends
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