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ENTREPRENEURIAL FINANCE
Leach & Melicher
Chapter 13
OTHER FINANCING
ALTERNATIVES
© 2003 South-Western College Publishing
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CHAPTER 13 :
LEARNING OBJECTIVES
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Identify relevant sources of debt-oriented
financing
Discuss government loan guarantee and
microcredit programs
Identify several potential sources of
funding for minority-owned enterprises
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CHAPTER 13 :
LEARENING OBJECTIVES
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Explain what differentiates venture
lending and leasing from traditional
lending and leasing
Describe factor financing and compare it
to receivables financing through a bank
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HELPING START-UP VENTURES
LOCATE FUNDING
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Facilitators
Consultants
Intermediaries
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Commercial v. Venture Bank
Lending
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Commercial Bank:
Use traditional
conservative
measures of
borrower’s ability to
repay and value of
assets recovered in
case of default
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Venture Banks
Interest and principal
represent only part of
return to Venture
Lender
Warrants (right to
buy equity at a
specific price)
provide remainder of
return
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FIVE “C’s” OF CREDIT ANALYSIS
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Capacity to repay – most critical
Capital – money you personally have
personally invested in business;
indication of extent of personal risk if
business fails
Collateral – additional forms of security
or guarantees provided to lender
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FIVE “C’s” OF CREDIT ANALYSIS
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Conditions – focus on the intended
purpose of the loan
Character – general impression you
make on the potential lender or investor
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COMMON LOAN RESTRICTIONS
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Maintenance of accurate records and
financial statements
Limits on total debt
Restrictions on dividends or other
payments to owners and /or investors
Restrictions on additional capital
expenditures
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COMMON LOAN RESTRICTIONS
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Restrictions on sale of fixed assets
Performance standards on financial
ratios
Current tax and insurance payments
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WHY VENTURES MAY NOT GET
DEBT FINANCING
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Large portion of startup assets are intangible
and provide no collateral
Receivables either don’t yet exist or collection
history is inadequate
Not economically plausible for bank to use
management involvement in a defaulting new
venture
Risk characteristics not a good match to
demand deposits or other bank liabilities
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USE OF CREDIT CARD
FINANCING DUE TO:
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Ease of obtaining credit card debt
Potential low cost when rolling balance
across various cards
Personal guarantees required on regular
bank loans
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SMALL BUSINESS
ADMINISTRATION (SBA)
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Created by an act of Congress for the
purpose of fostering the initiation and
growth of small businesses
Provides capital and credit
Guarantees general business loans
Helps create new jobs in small business
Makes investments through venture
capital programs
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SMALL BUSINESS
ADMINISTRATION (SBA)
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Provides disaster loans
Works with regulatory agencies
Helps small firms obtain government
business
Provides management and technical
assistance
Implements asset sales programs
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SMALL BUSINESS ADMINISTRATION
(SBA) Programs
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Debt financing and other financingrelated programs
Surety bond program
Federal procurement programs
Research and development
Business counseling & training
Business information services
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SMALL BUSINESS ADMINISTRATION
(SBA) Programs
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Advocacy programs
Disaster assistance
Assistance for armed forces veterans
Assistance for exporters
Assistance for native Americans
Assistance for small and disadvantaged
businesses
Assistance for women
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RECEIVABLE LENDING AND
FACTORING
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Factoring – selling receivables to a third
party at a discount from their face value
Receivables lending – use of receivables
as collateral for a loan
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DEBT, DEBT SUBSTITUTES, AND
DIRECT OFFERINGS
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Vendor financing: Accounts payable and trade
notes
* Terms “2 in 10, net 30”
Mortgage lending
Venture leasing – leases of equipment and
other assets where lessor takes an equity
interest (thru warrants) in venture
Direct public offerings- security offering made
directly to a large number of investors
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