Chapter 10: Financing Strategy and Tactics

Question 1

Financing

Answer 1

The act of providing or raising funds

Question 2

Three ways to Finance a Business

Answer 2

1. Grants/gifts
2. Borrow money(debt)
3. Exchange a share of business for money(represents equity)

Question 3

Risk Tolerance

Answer 3

The amount of risk that an individual is willing to sustain

Question 4

3 Ways to finance business expansion

Answer 4

1. Earnings
2. Debt
3. Share Capital

Question 5

Convertible Debt

Answer 5

Debt that can be turned into equity

Question 6

Advantages of Debt Financing

Answer 6

1. Lender has no say in operations, they just want their money
2. Loan Payments are predictable
3. Loan payments can be matched with the seasonal sales of the business

Question 7

Disadvantages of Debt Financing

Answer 7

1. If not paid, lender can force business into bankruptcy
2. Owner can lose personal possessions
3. Debt reduces available cash

Question 8

Advantages of Equity Financing

Answer 8

1. Investor cannot force business into bankruptcy
2. Investor wants business to succeed
3. No profit = no payout to investor

Question 9

Disadvantages of Equity Financing

Answer 9

1. Owner can lose control if too much ownership is shared.
2. Even with small amounts of shares, investors may interfere with the business via unsolicited advice etc
3. Profits are shared

Question 10

What about assistance from Familiy and Friends?

Answer 10

They can provide assistance. If it is a loan, official agreements should be written and made official.

Question 11

Peer to Peer Lending

Answer 11

A platform that connects prospective borrowers and lenders virtually

Question 12

5 Things Financial Institutions look for to give loans

Answer 12

1. Collateral- assets to back up the loan
2. Character- credit management
3. Capacity- available cash flow to cover monthly payments
4. Capital- How much you invested, and how much your family and friends invested.
5. Conditions- state of economy at the time of issue and duration of the loan.

Question 13

Venture Capitalists

Answer 13

An investor or investment company who finances new, high potential entrepreneurship companies, and second-stage companies (growth stage)

Question 14

Venture Capitalist return expectation

Answer 14

The expect to earn 6-10 times investment over a 5 year period

Question 15

Angel Investors

Answer 15

Wealthy individuals who invest in businesses.

Prefers manufacturing, energy, and some service industries; avoids retail

Question 16

Angel Investor return expectation

Answer 16

10 Times ROI over 5 years. However, requirements may vary

Question 17

Peer to Peer Investment

Answer 17

A platform that connects owners and potential investors virtually

Question 18

Insurance Companies

Answer 18

Provides policy loans, which are made against an insurance policy with a cash value

Question 19

Vendor Financing

Answer 19

Using good relations with vendors to get things on credit

Question 20

3 Categories of Financial Investments that can provide funds

Answer 20

1. Stocks: Shares- represents equity
2. Bonds: Loans made to companies by govt
3. Cash: Savings a/c, treasury bills, or other investments that can be liquidated in 24 hrs

Question 21

Share

Answer 21

A single unit of corporate stock

Question 22

Stock Market

Answer 22

A collection of exchanges around the world where stock is traded

Question 23

Details on Shares

Answer 23

1. Corporations, whether held privately or traded publicly, the corporation is owned by its shareholders
2. Public corporations sells shares publicly on stock market
3. Stocks may be preferred or common