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Slide 1
Small Business and
Entrepreneurship
Chapter 6
6-1
©2007 Prentice Hall
Chapter 6: Small Business and Entrepreneurship
Slide 2
Chapter 6 Objectives
After studying this chapter, you will be able to:
• Highlight the major contributions small
businesses make to the U.S. economy
• Identify the key characteristics that differentiate
small businesses from larger ones
• Discuss three factors contributing to the increase
in the number of small businesses
• Cite the key characteristics common to most
entrepreneurs
6-2
©2007 Prentice Hall
Chapter 6 Objectives
After studying this chapter, you will be able to:
Highlight the major contributions small businesses make to the U.S. economy
Identify the key characteristics that differentiate small businesses from larger ones
Discuss three factors contributing to the increase in the number of small businesses
Cite the key characteristics common to most entrepreneurs
Slide 3
Chapter 6 Objectives, cont.
• List three ways of going into business yourself
• Identify six sources of small-business assistance
• Discuss the principle sources of small-business
private financing
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©2007 Prentice Hall
Chapter 6 Objectives, cont.
List three ways of going into business yourself.
Identify six sources of small-business assistance
Discuss the principle sources of small-business private financing
Slide 4
The World of Small Business
• An entrepreneur
• An idea
• A Drive to succeed
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©2007 Prentice Hall
Most businesses start out like GeniusBabies.com: with an entrepreneur, an idea,
and a drive to succeed. Since the founding of the United States, small
businesses have been a vital part of the national economy. They play a role in
virtually every sector of the economy, from e-commerce companies such as
GeniusBabies.com to the independent contractors who drive routes for FedEx
Ground, the freight arm of FedEx. Many well-known entertainers, from singer Ani
DiFranco to comedian/actor Bernie Mac, became small-business owners as a
way to take control of their careers. The opportunities for small business
ownership are as diverse as the U.S. economy.
Irwin Speizer, “Going to Ground,” Workforce Management, December 2004, 39–
44.
. Alan Hughes, “Funny Money,” Black Enterprise, December 2004, 130–144; Bo
Burlingham, “Don’t Call Her an Entrepreneur,” Inc., September 2004, 97–102.
This slide includes an image of an older gentleman who is shaking hands with
what appears to be a banker. They appear to be standing inside of a bank near
the bankers desk.
Slide 5
Roles of Small Business
• Provide new jobs
• Introduce new
products
• Service large
corporations
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©2007 Prentice Hall
Here are just some of the important roles small businesses play in the economy:
They provide jobs. Small businesses employ about half of the private-sector
workforce in this country, and create 75 percent of new jobs.
They introduce new products. The National Science Foundation estimates that
98 percent of the nation’s “radical” new-product developments spring from small
firms.
They supply the needs of large corporations. Many small businesses act as
distributors, servicing agents, and suppliers to large corporations.
This slide includes an image on the right side of the slide. There is a large dollar
sign and a bar chart in the background. There is man standing on top of the
dollar sign attempting to point to one of the bars on the chart. There are four
business people at the bottom of the slide facing to the left.
Slide 6
Roles of Small Business
• Inject money into the
economy
• Take business risks
• Provide specialty
goods and services
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©2007 Prentice Hall
Here are just some of the important roles small businesses play in the economy:
They inject a considerable amount of money into the economy. Small businesses
spend $2.2 trillion annually, just a bit less than the $2.6 trillion spent by big
companies.
They take risks that larger companies sometimes avoid. Entrepreneurs play a
significant role in the economy as risk takers, the people willing to try new and
unproven ideas.
They provide specialized goods and services. When Mike Woods tried to teach
his son how to read, he couldn’t find any toys on the market that helped teach
phonics. So he left his job as a partner in a big law firm and started LeapFrog.
The company’s initial product was the Phonics Disk, a toy that teaches children
shapes, sounds, and pronunciation of letters and words.
This slide includes an image on the right side of the slide. There is a large dollar
sign and a bar chart in the background. There is man standing on top of the
dollar sign attempting to point to one of the bars on the chart. There are four
business people at the bottom of the slide facing to the left.
Slide 7
Characteristics of Small
Businesses
Lifestyle
High-Growth
Run by Individuals
Run by Teams
Limited Products/Services
Multiple Products/Services
Limited Resources
Investment Capital
Limited Marketplace
Large Marketplace
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©2007 Prentice Hall
Small businesses are of two distinct types: lifestyle businesses and high-growth
ventures. Roughly 80 to 90 percent are modest operations with little growth
potential (although some have attractive income potential for the solo
businessperson). The self-employed consultant working part-time from a home
office, the corner florist, and the neighborhood pizza parlor fall into the category
of lifestyle businesses--firms built around the personal and financial needs of an
individual or a family. Lifestyle businesses aren’t designed to grow into large
enterprises.
In contrast to lifestyle businesses, some firms are small simply because they are
new. Many companies--such as FedEx, Microsoft, and Papa John’s--start out as
small entrepreneurial firms but quickly outgrow their small-business status.
These high-growth ventures are usually run by a team rather than by one
individual, and they expand rapidly by obtaining a sizable supply of investment
capital and by introducing new products or services to a large market. But
expanding from a small firm into a large enterprise is no easy task; there’s a
world of difference between the two.
Slide 8
Factors Contributing to an
Increase in Small Business
• E-Commerce
• Technology
• Diversity
• Corporate downsizing
• Outsourcing
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©2007 Prentice Hall
Three factors are contributing to the increase in the number of small businesses
today: e-commerce and other technological advances, the growing diversity in
entrepreneurship, and corporate downsizing and outsourcing.
This slide includes an image of two computers with a globe in the background.
The right computer has a red line that is pointing to the left computer.
Slide 9
E-Commerce and Technology
• New business
• E-tailing opportunities
• Resources
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©2007 Prentice Hall
E-commerce and other technologies have spawned thousands of new business
ventures in recent years—both firms that create the technology and firms that
use it. GeniusBabies.com is a perfect example of a small business enabled by
the Internet (see Exhibit 6.1). Consider the difference it has made in Michelle
Donahue-Arpas’s life. As you’ll see at the end of the chapter, she opted to launch
her company as an online-only retail operation. Without the Internet, she would
have to either sacrifice family time and run her business out of a traditional retail
store or find a considerable source of money to finance the catalog operations of
a traditional mail-order company.
This slide includes an image of a computer that has several letters and
envelopes coming out of the computer monitor.
Slide 10
Diversity
• Growing
women/minority
ownership
• Immigrant start-ups
• Young professionals
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©2007 Prentice Hall
Minority business ownership is also on the rise across the United States. Minorities now
own 15 percent of all U.S. businesses. Part of this growth is attributed to firms that do a
better job of marketing to specific segments of the population. For example, Hispanicowned businesses have been doing better than the economy as a whole in recent years,
thanks in large part to their success at marketing to the growing Hispanic American
population.
The tradition of immigrants starting small companies stretches back to the first days of
the United States and continues strong today. With help from programs such as
StartSmart, run by Coastal Enterprises in Wicasset, Maine, immigrants and political
refugees get coaching and assistance on achieving financial independence through
business ownership.
Finally, young people are one of the strongest forces in entrepreneurship today and
launch the majority of all new businesses. It’s never too early to start; Google, Microsoft,
Dell, and plenty of other high-flying companies were started by college students.
“Advocacy Small Business Statistics and Research,” U.S. Small Business
Administration [accessed 3 July 2007] www.sba.gov.
. Jim Hopkins, “Hispanic-Owned Companies See Strong Growth Spurt,” USA Today, 2
July 2003, B1.
. Coastal Enterprises website [accessed 3 July 2007] www.ceimaine.org; David J. Dent,
“Coming to America,” Inc., November 2004, 100–107.
. Scarborough and Zimmerer, Effective Small Business Management, 16.
This slide includes an image of a globe with North America showing and several
diversified hands that appear to be holding up the globe.
Slide 11
Downsizing and Outsourcing
• Recession start-ups
• Value web
• Opportunity
generation
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©2007 Prentice Hall
Contrary to popular wisdom, business start-ups often soar when the economy
sours. During hard times, many companies downsize or lay off talented
employees, who then have little to lose by pursuing self-employment. In fact,
several well-known companies were started during recessions.
The outsourcing and value web phenomena discussed in Chapter 4 (page 87)
create numerous opportunities for small businesses and entrepreneurs. Some
companies subcontract special projects and secondary business functions to
experts outside the organization. Others turn to outsourcing as a way to
permanently eliminate entire departments.
This slide includes an image of a very large hand removing a chair from what
appears to be a game of musical chairs. There are two people sitting in chairs,
and two people trying to share the chair that is remaining.
Slide 12
Characteristics of
Entrepreneurs
• Highly disciplined
• Like to control their destiny
• Listen to their intuition
• Relate well with others
• Eager to acquire new skills
• Learn from their mistakes
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©2007 Prentice Hall
Contrary to what you might expect, most entrepreneurs are not glamorous
adventurers; instead, they are often ordinary people. Most entrepreneurs have
these qualities in common:
They are highly disciplined.
They like to control their destiny.
They listen to their intuitive sense.
They relate well to others.
They are eager to learn whatever skills are necessary to reach their goal.
They learn from their mistakes.
Slide 13
Characteristics of
Entrepreneurs
• Stay abreast of market changes
• Exploit new opportunities
• Seldom follow trends
• Driven by ambition
• Think positively
• Prefer risk taking over security
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©2007 Prentice Hall
They stay abreast of market changes.
They are willing to exploit new opportunities.
They seldom follow trends (rather, they spot and interpret trends).
They are driven by ambition.
They think positively.
They prefer the excitement and potential rewards of risk taking over security.
While most entrepreneurs are anxious to become their own boss, most cite
making money as a secondary reason for starting their own business, not the
primary reason.
Slide 14
Importance of a Business Plan
Guide Operations
Outline Strategy
Attract Lenders
and Investors
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©2007 Prentice Hall
Preparing a business plan serves two important functions: First, it guides the
company operations and outlines a strategy for turning an idea into reality;
second, it helps persuade lenders and investors to finance your business. In fact,
without a business plan, many investors won’t even grant you an interview. Keep
in mind that sometimes the greatest service a business plan can provide an
entrepreneur is the realization that “the concept just won’t work.” Discovering this
on paper can save you considerable time and money.
This slide includes a blurred image of three business people standing over a
table discussing some sort of plan.
Slide 15
The Business Plan Purpose
• Summarize business
venture
• Communicate goals
• Highlight strategies
• Strategic advantages
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©2007 Prentice Hall
Getting started in a new business requires a lot of work, not the least of which is
planning. Planning forces you to think ahead. Before you rush in to supply a
product, you need to be sure that a market exists. You must also try to foresee
some of the problems that might arise and figure out how you will cope with
them.
One of the first steps you should take toward starting a new business is to
develop a business plan, a written document that summarizes an
entrepreneur’s proposed business venture, communicates the company’s goals,
highlights how management intends to achieve those goals, and shows how
consumers will benefit from the company’s products or services.
This slide includes an image of several business people that appear to be in a
huddle strategically planning.
Slide 16
The Business Plan Blueprint
•
•
•
•
•
•
•
•
Summary
Mission and objectives
Company and industry
Products or services
Market and competition
Management
Marketing strategy
Design and
development plans
6-16
©2007 Prentice Hall
Summary. In one or two pages, summarize your business concept. Clearly articulate your
business model and strategy for success—astute investors know what makes a business work,
and they want to know that you do, too. Describe your products and their market potential.
Highlight some things about your company and its owners that will distinguish your firm from the
competition. Summarize your financial projections and the amount of money investors can expect
to make on their investment. Be sure to indicate how much money you will need and for what
purpose.
Mission and objectives. Explain the purpose of your business and what you hope to accomplish—
and before you take another step, make sure that this is a mission you can pursue with passion,
through thick and thin, with every ounce of commitment and energy you can muster.
Company and industry. Give full background information on the origins and structure of your
venture and the characteristics of its industry.
Products or services. Give a complete but concise description of your product or service, focusing
on its unique attributes. Explain how customers will benefit from using your product or service
instead of those of your competitors.
Market and competition. Provide data that will persuade the investor that you understand your
target market and can achieve your sales goals. Be sure to identify the strengths and
weaknesses of your competitors.
Management. Summarize the background and qualifications of the principals, directors, and key
management personnel in your company. Include résumés in the appendix.
Marketing strategy. Provide projections of sales and market share, and outline a strategy for
identifying and contacting customers, setting prices, providing customer services, advertising, and
so forth. Whenever possible, include evidence of customer acceptance, such as advance product
orders.
Design and development plans. If your product requires design or development, describe the
nature and extent of what needs to be done, including costs and possible problems.
This slide includes an image of a construction worker with a hard hat. He is carrying several
blueprints.
Slide 17
The Business Plan Blueprint
•
•
•
•
Operation plans
Overall schedule
Critical risks and problems
Financial projections and
requirements
• Exit strategy
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©2007 Prentice Hall
Operations plan. Provide information on the facilities, equipment, and labor
needed.
Overall schedule. Forecast development of the company in terms of completion
dates for major aspects of the business plan.
Critical risks and problems. Identify all negative factors and discuss them
honestly.
Financial projections and requirements. Include a detailed budget of start-up and
operating costs, as well as projections for income, expenses, and cash flow for
the first three years of business. Identify the company’s financing needs and
potential sources.
Exit strategy. Explain how investors will be able to cash out or sell their
investment, such as through a public stock offering, sale of the company, or a
buyback of the investors’ interest.
This slide includes an image of a construction worker with a hard hat. He is
carrying several blueprints.
Slide 18
Small Business Ownership
• Start-up
• Buy a business
• Franchise
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©2007 Prentice Hall
Once you’ve done your research and planning, if you decide to take the risk, you
can get into business for yourself in three ways: Start from scratch, buy an
existing business, or obtain a franchise. Roughly two-thirds of business founders
begin start-up companies; that is, they start from scratch rather than buying an
existing operation or inheriting a family business. Starting a business from
scratch has many advantages and disadvantages.
This slide includes an image of a business man holding a briefcase in his left
hand and a very large light bulb in his right hand.
Slide 19
Starting a New Business
Advantages
Disadvantages
+ Control your destiny
– Uncertainty of income
+ Reach your potential
– Risk of loss
+ Unlimited profits
– Long hours & hard work
+ Recognition
– Complete responsibility
+ Doing what you enjoy
– High stress levels
6-19
©2007 Prentice Hall
Some advantages of starting a new business include:
Control your destiny
Reach your potential
Unlimited profits
Recognition
Doing what you enjoy
Some disadvantages include:
Uncertainty of income
Risk of loss
Long hours & hard work
Complete responsibility
High stress levels
Slide 20
Buying an Existing
Business
Advantages
Disadvantages
+ Customer base
– Alienated customers
+ Business systems
– Obsolescence
+ Product or service
– Location
+ Location
– Personality clashes
+ Financing
– Outstanding receivables
6-20
©2007 Prentice Hall
Another way to go into business for yourself is to buy an existing business. This
approach tends to reduce the risks--provided, of course, that you check out the
company carefully. When you buy a business, you generally purchase an
established customer base, functioning business systems, a proven product or
service, and a known location. You don’t have to go through the painful period of
building a reputation, establishing a clientele, finding suppliers, and hiring and
training employees. In addition, financing an existing business is often much
easier than financing a new one; lenders are reassured by the company’s history
and existing assets and customer base. With these major details already settled,
you can concentrate on making improvements.
Still, buying an existing business also has disadvantages. For one thing, the
business may be overpriced. For another, inventories and equipment may be
obsolete. Furthermore, the location may no longer be satisfactory, the previous
owner may have created ill will, your personality may clash with those of existing
managers and employees, and outstanding bills owed by customers may be
difficult to collect. Keep in mind that no matter how fast you learn and how much
investigating you do, you’re likely to find that the challenges of running an
existing business are far greater than you anticipated.
Slide 21
The Franchising Alternative
• Product franchise
• Manufacturing
franchise
• Business-format
franchise
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©2007 Prentice Hall
Franchises are of three basic types. A product franchise gives you the right to
sell trademarked goods, which are purchased from the franchisor and resold. Car
dealers and gasoline stations fall into this category. A manufacturing franchise,
such as a soft-drink bottling plant, gives you the right to produce and distribute
the manufacturer’s products, using supplies purchased from the franchisor. A
business-format franchise gives you the right to open a business using a
franchisor’s name and format for doing business. This format including many
well-known chains, including Taco Bell, Pizza Hut, UPS Stores, and Curves
fitness centers.
This slide includes an image of a large scale with two packages on that scale
being weighed for shipment.
Slide 22
Evaluating a Franchise
• Initial franchise
• Exclusive territory
• Periodic royalties
• Right of first refusal
• Trademarks and names • Equipment and supplies
• Agreement termination
• Advertising and
• Franchise agreement
promotion
• Business location
6-22
©2007 Prentice Hall
How do you protect yourself from a poor franchise investment? The best way is
to study the opportunity carefully before you commit. This slide and the next
suggest some points to consider as you study the package of information on the
franchise.
What is covered by the original franchise fee? Does it cover a starting inventory
of products and supplies?
How are the periodic royalties calculated and when are they paid?
Are all trademarks and names legally protected?
Who provides and pays for advertising and promotion?
Who selects the location of the business?
Is the franchise assigned an exclusive territory?
If the territory is not exclusive, does the franchisee have the right of first refusal
on additional franchises established in nearby locations?
Is the franchisee required to purchase equipment and supplies from the
franchisor or other suppliers?
Under what conditions can the franchisor and/or the franchisee terminate the
franchise agreement?
Can the franchise be assigned to heirs?
Slide 23
Pros and Cons of Franchising
Advantages
Disadvantages

Get a viable business

No guarantee of wealth

Name recognition

High monthly royalties

Network of support

Limited independence

Blueprint for success

Limited flexibility
6-23
©2007 Prentice Hall
Why is franchising so popular? For one thing, when you invest in a franchise, you
know you are getting a viable business, one that has “worked” many times
before. If the franchise is well established, you get the added benefit of instant
name recognition, national advertising programs, standardized quality of goods
and services, and a proven formula for success. Buying a franchise also gives
you instant access to a support network, and in many cases a readymade
blueprint for building a business.
Although franchising offers many advantages, it is not the ideal vehicle for
everyone. First, owning a franchise is no guarantee of wealth. Even though it
may be a relatively easy way to get into business, not all franchises are hugely
profitable. One of the biggest disadvantages of franchising is the monthly
payment, or royalty, that must be turned over to the franchisor. Another drawback
of franchises is that many allow individual operators little independence.
Franchisors can prescribe virtually every aspect of the business, down to the
details of employee uniforms and the color of the walls. Furthermore, when a
chain loses its cutting edge in the marketplace, being stuck with a franchise can
be painful. In addition, if independent retailers run into trouble with their product
lines, they can change suppliers or perhaps switch rapidly to a whole new line of
business. Franchisees can’t.
Slide 24
Why Small Businesses Fail
•Management Incompetence
•Diminished Customer Base
•Lack of Experience
•Uncontrolled Growth
•Insufficient Financing
•Inappropriate Location
•Poor Business Planning
•Inadequate Controls
•Unworkable Goals
•Poor Entrepreneurial Skills
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©2007 Prentice Hall
Businesses can fail for any number of reasons, as the table above suggests.
Lack of management skills, experience, and proper financing are among the top
10 reasons for failure. So is uncontrolled growth. Growth forces changes
throughout the organization that affect every aspect of the business operation.
When growth is too rapid, it can force so much change that things spin out of
control. And nothing can kill a successful business faster than chaos.
Besides growing too rapidly, another mistake entrepreneurs make is to stray too
far from the original product or market.
Even when signs of failure begin to surface, some entrepreneurs don’t pull the
plug fast enough.
Slide 25
Sources of Small Business
Assistance
• Government agencies
• Advisory boards
• Nonprofit
• Media
organizations
• Business partners
• Mentors
• Networks
• Business incubators
and accelerators
6-25
©2007 Prentice Hall
A number of city, state, and federal government agencies offer business owners
advice, assistance, and even financing in some cases. For instance, many cities
and states have an office of economic development (or similarly named agency)
chartered with helping companies prosper so that they might contribute to the
local or regional economy. At the federal level, small businesses can apply for
loans backed by the Small Business Administration (www.sba.gov) and learn
more about selling to the federal government—including bidding on the many
contracts reserved for small or minority-owned companies—at
www.business.gov. Many government agencies also have special offices
(check their websites) to help small firms compete.
The companies you do business with can also be a source of advice and
support. For example, Bank of America’s (www.bankofamerica.com) Small
Business Resource Center offers a variety of articles, online tutorials, and
financial calculators. Similarly, Microsoft (www.microsoft.com/smallbusiness)
offers free seminars, podcasts, and webcasts with information of interest to small
business owners.
Mentors and Advisory Boards
Many entrepreneurs and business owners take advantage of individual mentors
and advisory boards.
Your local library and the Internet offer enough information to help any small
business owner face just about every challenge imaginable. For instance, blogs
written by business owners, investors, and functional specialists such as
marketing consultants can offer valuable insights.
No matter what industry you’re in or what stage your business is in, you can
probably find a local or line network of people with similar interests. For instance,
some entrepreneurs meet regularly in small groups to analyze each other’s
progress month by month.
A business incubator is a center that provides “newborn” businesses with just
about everything a company needs to get started, from office space to
information technology to management coaching, usually at sharply reduced
costs.
A business accelerator is similar to an incubator, and the terms are often used
interchangeably. Generally speaking, accelerators focus more on providing
advice and financing (in some cases) and less on providing office space and
other infrastructure. To find an incubator or accelerator in your area, search
online or contact your city or state economic development office.
Slide 26
Financing a New Business
Private Financing
Banks and
MicroMicro-lenders
Venture Capitalists
Angel Investors
6-26
©2007 Prentice Hall
Once you’ve decided to go into business for yourself, you will probably need
some money to get started. Where can firms obtain the money they need to
launch and operate a new business? Most new businesses turn to private
financing sources, such as family, friends, and loans from banks, finance
companies, or other commercial lenders. As the start-up grows, owners can raise
additional funds by selling shares of stock to the public.
As you can imagine, financing an enterprise is a complex undertaking. The
process begins by assessing the firm’s financing needs and determining whether
funds are needed for the short or the long term. You must also assess the cost of
obtaining financing, and you must weigh the advantages and disadvantages of
financing through debt or equity, taking into consideration the firm’s special
needs and circumstances. In short, choosing the right sources of financing can
be just as important as choosing the right location. Your decision will affect your
company’s capital structure—the mix of debt and equity—forever.
Private financing covers every source of funding except selling stock to the public
via a stock market.
Bank loans are one of the most important sources of financing for small
business—but there’s an important catch: In most cases, banks won’t lend
money to a start-up that hasn’t established a successful track record.
Venture capitalists (VCs) are investment specialists who raise pools of capital
from large private and institutional sources (such as pension funds) to fund
ventures that have high growth potential and a need for large amounts of capital.
Start-up companies that can’t attract VC investment often look for angel
investors, private individuals who put their own money into start-ups with the goal
of eventually selling their interest for a large profit.
This slide includes an image of what appears to be a bank. Surrounding the bank
are pictures of a dollar sign and a percentage sign.
Slide 27
The Cost of Capital
• Risk factors
• Interest rates
• Funding vehicles
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©2007 Prentice Hall
In general, a company wants to obtain money at the lowest cost and least
amount of risk. However, lenders and investors want to receive the highest
possible return on their investment, also at the lowest risk. A company’s cost of
capital, the average rate of interest it must pay on its financing, depends on three
main factors: the risk associated with the company, the prevailing level of interest
rates, and management’s selection of funding vehicles.
Obviously, the more financially solid a company is, the less risk investors face.
However, time also plays a vital role. Because a dollar will be worth less
tomorrow than it is today, lenders need to be compensated for waiting to be
repaid. As a result, long-term financing generally costs a company more than
short-term financing.
This slide includes an image on the right side of the slide. There is a large dollar
sign and a bar chart in the background. There is man standing on top of the
dollar sign attempting to point to one of the bars on the chart. There are four
business people at the bottom of the slide facing to the left.
Slide 28
Obtaining Capital
Debt Financing
Equity Financing
Secured
SecuredLoans
Loans
Stock
StockSales
Sales
Unsecured
UnsecuredLoans
Loans
Initial
InitialPublic
Public
Offering
Offering
6-28
©2007 Prentice Hall
Debt financing refers to what people normally think of as a loan. A creditor
agrees to lend money to a debtor in exchange for repayment, with accumulated
interest, at some future date. Loans can be secured or unsecured. Secured
loans are those backed by something of value, known as collateral, which may
be seized by the lender if the borrower fails to repay the loan. The most common
types of collateral are accounts receivable, inventories, and property such as
marketable securities, buildings, and other assets. Unsecured loans are ones
that require no collateral.
Equity financing is achieved by selling shares of a company’s stock. Whenever a
corporation offers its shares of ownership, or stock, to the public for the first
time, the company is said to be going public. The initial shares offered for sale
are the company’s initial public offering (IPO). Going public is an effective
method of raising needed capital, but it can be an expensive and time-consuming
process with no guarantee you'll get the amount of money you need.
Slide 29
Debt Versus Equity
Characteristic
Debt
Equity
Maturity
Specific
Nonspecific
Claim on Income
Fixed Cost
Variable Cost
Claim on Assets
Priority
Residual
Influence on Management
Little
Varies
6-29
©2007 Prentice Hall
When choosing between debt and equity financing, you should weigh the
advantages and disadvantages of each. In addition to considering whether the
financing is for the short or the long term and assessing the cost of the financing,
such as interest, fees, and other charges, you must also evaluate your desire for
ownership control. Two of the biggest benefits of debt financing are (1) the lender
does not gain an ownership interest in the business, and (2) a firm’s obligations
are limited to repaying the loan. By contrast, equity financing involves an
exchange of money for a share of business ownership: It allows firms to obtain
funds without pledging to repay a specific amount of money at a particular time,
but in exchange for this benefit the firm must give up some ownership control.