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