Economic Development Finance Flashcards
almost every aspect of implementing economic development projects or programs involves securing ____
financing
business have different financing needs based on what ____
stage of the business cycle they’re in
working capital focuses on the most _____
liquid assets used in the operation of an entity (cash, marketable securities, accounts receiveable, accounts payable, accruals, short-term loans, inventory, pre-paid expenses, etc.
fixed assets are longer-lived assets like
plants, property, and equipment
working capital is often used to meet short term debt obligations or debt due within
the next twelve months
because working capital generally generates income almost immediately a business will typically use ______ financing to finance temporary increases in working capital
short term financing
what are some examples of short term financing
short term bank loan, line of credit or trade credit
most fixed asset investments are used to
expand or improve production capacity or efficiency or replace equipment
fixed assets are normally financed with _____ because of how costly they are. They also don’t result in an immediate increase in sales sufficient to cover their costs
long-term loans (longer than 12 months)
financing needs of most new businesses come in the form of _____
equity
Does equity require immediate repayment?
No.
equity fiancing provides a ______ on which debt can be leveraged
capital base
trade credit is credit extended by an ____ It is often unavailable to new firms because there is not a strong relationship yet
entity’s suppliers
For a VC to invest in a start-up, the expected retunr has to be___
high enough to offset the greater risk incurred
Private sector commercial lenders don’t like to finance start-ups without some kind of ______ like those offered by the SBA
loan guarantee
the conditions of private lenders on start-ups is often ___ for start-ups
too expensive
banks negatively view high ______ as it increases the chances that the business will have difficulty meeting its regular debt payments
debt/equity
small businesses face a ___ in private financing when trying to obtain long-term financing of fixed assets
gap
many commercial banks don’t provide loans smaller than $___
100,000
microloans are typically $____ or less
$25,000
commercial banks are typically short to medium-term lenders which means
they don’t prefer to lend for periods of more than 10 years, often not more than 7; longer terms have prohibitive principal and interest
insurance companies are long-term lenders but tend to limit their investments to projects over ____ in value
$1million
firms with cyclical demand need extra cash to _____ when _____
finance the buildup of inventory in anticipation of future sales; actual sales are low
for cyclical or seasonal demand, larger firms often have a ______
bank line of credit
interest rates and conditions on line of credit are
prohibitive
many banks won’t offer lines of credit that are less than ____
$1 million
small, minority, and or new contractors often don’t have the ______ to pay up front for expenses required to undertake a contract and finance the costs until full payment is received for services
line of credit
sharp sustained increases in sales create the need to _______ and create the need for short-term and _____ capital
ramp up production quickly; long term
many firms encounter problems with getting export financing because
banks are unfamiliar with international banking transactions, there is a perception of risk, there is potential for exchange rate losses during currency conversion, political instability in foreign markets
mature firms typically need lines of credit for___
replacing equipment or improving production
some of the challenges that mature firms might have around financing occur because
sales are declining but expenses are not
heavy investment in fixed assets make it hard to cut costs
facilities may be hard to sell because of their location or they have become obsolete
private sector financial institutions provide two forms of financial capital:
debt and equity
debt capital is capital that needs to be paid back on afixed schedule and can include
loans, bonds,
loans are
the transfer of capital between a borrower and a single lender
bonds are
sold to many investors
the most common type of debt is a
loan
in return for a lender’s investment, ____ is charged
interest
interst charges are typically due within the following timeframes
the debt period
at the end of the debt period
in advance of the principal
list some debt sources
banks, mortgage companies, credit unions, pension funds, industrial revenue bonds, savings and loans
___, ____, and ____ are the most familiar sources of debt capital. they rely primarily on a businesses ability to pay and only secondarily on _____ offered as collateral
banks, credit unions, and savings and loan institutions; assets offered as collateral
in return for equity investment, investors receive ______ in the venture
partial ownership
equity investments are primarily in the form of ____, however any capital that an owner invests is considered equity
stocks
private sources of equity include
friends, associates, and relatives venture capitalists angel investors public or private sale of common or preferred stock private or corporate investors
public sector funding solutions are meant to ______ to ensure that access to capital is extended to entities that are credit-worthy but not considered good risks in traditional commercial terms
leverage private lenders and investors
the role of the public sector is to invest in ventures or projects where
the economic and social benefits outweigh the risk of financing
public lending assistance should not
offer services to clients that have access to and qualify for conventional financing in amounts adequate for their need
typical public sector financing goals and programs include
- lowering the cost of borrowing
- lowering risk
- provid investment programs
- package loans
- direct lending and financing
- offer technical assistance
lowering cost of borrowing =
public sector subsidizes the difference between the market and discounted interest rate, reducing what the borrower has to pay the lender
lowering risk =
public guarantees promise to assume responsibility for a % of an outstnading debt in the case of default
provide investment programs =
these address the needs of underserved groups with tools like start-up loans, small working capital loans, microloans, seed and venture capital, and export loans
package loans =
facilitate and coordinates the loan process
direct lending or investing =
act as a direct, subordinate, or primary lender through offering things like federal grants local revenue appropriations investment portfolios pension fund investments
technical assistance =
helps to improve the credit-worthiness of entities by teaching the fundamentals of running a business and focuses on the following: financial administration business or strategic planning management assistance marketing or selling strategies product design and development
the main federal sources of financing are
Small Business Administraion
US Department of Agriculture
Dept. of Housing and Urban Development
the most common sources of state and local financing include
direct lending revolving loans microloans state financing programs federal financing programs
direct lending =
EDO acts as the lender using federal or state grants local revenue appropriations investment portfolios bond issues pension funds and endowments foundations
direct lending gives the EDO great flexinility in determing
termas, structure, and recipients
direct funding should only provide _____ or leverage private sector financing for projects that ______
gap; can’t secure it on their own
revolving loan funds =
emerged in 1970s and the repayment of loans made is recycled into future lending. as loans are repaid the principal and interest return to a loan pool that can be lent to other businesses
RLFs typically offer ___
a lower rate and longer term
microloan/microcredit programs =
provide small loans to small business
the max microloan size is ____ but the average is _____
$35,000; $10,500
development authorities are
special state authorities that can assist firms with working capital needs
common development authority funding funding sources include
direct loans, loan guarantees, and equity invesments
states use three approaches to expand _____ supply
venture capital
the three approaches states use for VC are
- directly invest in firms through state-controlled institutions
- investing in privately managed funds to expand local VC
- provide incentives through tax credits that increase private investment
the five sources of federal financing are
the SBA HUD USDA Department of Treasury US EDA
how can economic development organizations lower the cost of borrowing, lower the credit risk of a company, or increase access through different investment product?
by packaging loans, providing direct loans, or providing technical assistance
to lower the cost of borrowing, the public sector ____ between the market and the discounted rate, reducing interest rates that must be paid to the lender
subsidizes the difference
to lower the credit risk of a company, the public sector ____
guarantees a percentage of a private sector loan against default, making the investment more attractive to the lender
the public sector can establish lending programs that address the special needs of under-served groups that include
start-up loans, small working capital loans, microloans, seed and venture capital, export loans, and Small Business Investment Companies
as a loan packager, the EDO acts as a conduit:
facilitating and coordinating the loan process
in direct lending or investing situations, the EDO as the
direct, subordinate, or primary lender using its own funds or funds it controls
direct lending capital SOURCES include
federal or state grants
local revenue appropriations
investment portfolios
private sector investments like pension funds
direct investing gives the EDO more flexibility in determining loan
terms, structure and recipients
examples of direct lending programs include
revolving loan funds and seed and venture capital funds
direct financing programs should only provide ____ financing
gap
technical assistance generally focuses on
financial administration business or strategic planning management assistance marketing/selling strategies product design and development
economically targeted invesemtns direct funds to opportunities that earn _________ while producing ______
competitive financial returns; economic development benefits
common criteria used by banks to determine credit risk include
management ability
repayment ability
collateral
equity in business
banks look for a debt to equity ratio of
2 to 1 or less - $1 invested by owners for every $2 borrowed
current assets are the “___” meaning they can easily be converted into ___ to pay bills
“most liquid”; cash
current assets include
cash cash equivalents (very liquid short term investments including money market funds) accounts receivable inventory prepaid expenses like fire insurance
the quality of current assets gives an indication of the ability of a company to _____
meet its current obligations
accounts receivable =
amount of money owed to a company by its customers who have purchased good s and services
activity ratios measure
how well a company is using its assets
activity ratios include
accounts receivable turnover, days accounts recievable , inventory turnover ratio, days inventory
accounts receivable turnover is the number of times ____ are collected during the year
receivable
accounts receivable turnover equation
accounts receivable turnover = net sales/accounts receivable
days receivable measures the _____ it takes for a firm to collect its accounts receivable
average number of days
days receivable equation equation
days receivable = accounts receivable/sales x 360
inventory turnover ratio indicates the number of times per year the inventory is ____ or _____
sold; turns over
inventory turnover ratio equation
inventory turnover ratio = cost of good sold/inventory for period
Just in Time Inventory (JIT)
practice by which manufactures cut cost by ordering inventory so it arrives right before its used in the manufacturing cycle
average days inventory is a measure of the _____ it takes for a company to sell its inventory
average number of days
average days inventory equation
days inventory = inventory/cost of goods sold x 360
current liabilities are debts that come due within the same _____ as the current assets; 12 months
time period
current liabilities include
short term notes payable accounts payable accruals income taxes payable current portion of long-term debt
notes payable =
money borrowed for a bank or other lender on a short term basis like a line of credit
ACCOUNTS PAYABLE =
monies owed to suppliers for services and inventory
days payable measure the average length of time between ____ and payment for them
purchase of goods
days payable equation
days payable = account payable/cost of goods sold x 360
ACCRUALS are money owed to providers of goods and services for which NO____
official bill exists or billing process takes place
accruals include wages
payroll taxes
fringe benefits and pension funds deposit
rent
interest due on loans
liquidity ratios measure a firm’s _____ ability to pay its ___ obligations
short-run; maturing
what are two measures to determine liquidity
current ratio
quick ratio
current ratio is the most common measure of ____
short term credit
current ratio equation
current ratio = current assets/current liabilites
the higher the current ratio the more ___ the business
solvent
quick ratio is like current ratio but focuses on the most ___ of an entity’s asstes
most liquid
quick ratio equation
quick ration = cash & accounts receivable/current liabilites
quick ratio should be at least
1:1
operating cycle can be defined by the amount of hard cash that a company has tied up in ____
operating assets
operating cycle (cash conversion cycle) equation
CCC = days accounts receivable + days inventory - days accounts payable
working capital measures how much in liquid assets a company has available to ____ its business
build
working capital equation
working capital = current assets - current liabilites
working capital ratio gives an indication of the ___ of working capital
turnover
working capital ratio equation
working cap ratio = net sales/working capital
