Sources of Capital Equity Versus Debt Capital Source
Sources of Capital • Equity Versus Debt Capital
Source of Equity Capital • • • Personal Savings Friends and Relatives Angels Corporations Venture Capitalists (VCs) Going Public (IPOs)
Family & Friends Financing • • • Consider the impact of the Investment Keep it strictly business Settle the details up front Create a written contract Treat the money as “bridge financing” Develop a payment schedule
Angels • Individuals who wish to assist others in their business venture • Usually found through networks • Reasonable expectations on equity position and ROI • Often passive, but realistic perspective about business venture • Exit strategy is important
Venture Capitalists (VCs) • Funds are more specialized versus homogeneous • Feeder funds are emerging • Small start-up investments are drying up • High expectations of equity position and ROI • New legal environment
Legal Environment: Investment Agreement • • • Choice of Securities Control Issues Evaluation Issues & Financial Covenants Remedies for Breach of Contract Business Model
Sources of Debt Capital • • Commercial Banks Trade Credit Equipment Suppliers Savings & Loans Insurance Companies Credit Unions Private Placements
Five Cs of Credit • • • Character Capacity (Cash Flow) Capital Conditions Collateral
Character • • • Individual Attributes Passion Integrity Experience Staying Power
Capacity • Can the business survive? • Will someone actually purchase the product or service? • Can the business produce the product or service economically? • Can the business make money?
Capital • What level of paid in capital are the primary founders contributing? • What percent of the total capital funding needed is being requested? • How is the capital being used in the business? • Is the capital requested reasonable?
Conditions • • • Potential growth in the market? Competition Location Form of Ownership Loan Purpose Payoff
Conditions: Banker’s Perspective • • Economy Industry Interest Rates Business Experience Individual(s) Experience Inflation Rate Demand for Money Risk
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