Funding sources Flashcards
What are the three funding sources?
- Internal business
- Equity
- Debt
What falls under internal business funding?
-Working capital “circulating capital”
-Fixed asset “capital”
-Fixed asset funding
Difference between current assets and current liabilities
-Related: Factoring
Working capital “circulating capital”
-Factoring: selling A/R to another party or business
Long term capital that is invested in a small business
-Funds invested into fixed assets that wont be converted to cash within one year
Fixed asset capital
Paying down loans builds equity for a business
-Equity can be borrowed against for certain type of assets (home equity loan, home equity line of credit, reverse mortgage)
Fixed asset funding
Funding in exchange for ownership stake
-Cash in exchange for stock/ ownership
-No repayment
-Investors profit through dividends/ intrinsic value of the firm (private is salary, public is intrinsic value)
Equity funding
Type of equity that
-Closely held companies (privately) = private equity
-Public traded company = IPO (initial public offering)
Fundraising
Any borrowed or loaned capital “principal”
-Invested in the business
-Must be repaid
-Cash to be repaid with interest (investors profit through interest)
Debt
Who can be a lender?
-Banks: commercial business loans, mortgages
-People: friends, family, venture capitalist, angel investors
-Businesses
-Organizations: SBA
Anyone that invests in or financially sponsors a new business
Venture capitalist
Private investors that are willing to supply financing for a risky new small startup
Angel investors
Raising small investments from many investors via the internet
Crowdfunding
How does the SBA aid in funding small businesses
It matches businesses with loaners
Type of loans with laxed terms
-Usually for students, housing, business, agriculture, and veterans
-Ex. a housing loan at 3-10% interest rather than 20%
Government backed loans
What are the general steps for an SBA loan?
-Choose an SBA loan
-Confirm eligibility
-SBA finds a lender
-Gather required documents and submit an application
-Close on the loan
What is the most common type of SBA loan?
7(a) loan guaranty program
-Primary loan program
-Loan amounts are between $500,000 - $5mil
What are the 5 Cs of credit (5 factors the banks consider when giving out a loan)
- Character (credit history)
- Collateral (offers assurance to bank, repossession items)
- Capital ( borrowers level of seriousness)
- Capacity ( borrower’s debt-income ratio)
- Condition ( interest rate amount of principal)
What is a repayment timeframe?
Proportional to payoff/ return
What is the repayment timeframe for
1. Business
2. Mortgage
- 5-10 years
- 15-30 years
A large payment required at a point during the term to repay the balance of a loan in full
Balloon payment
Interest rate charged by commercial banks on loans to their most credit worthy (best) customers
Prime rate
What are the definitions of the principal when borrowing vs investing?
Borrowing: face note of a promissory note upon which interest is computed
Invested: how much do I have in my account
Like a traditional loan, but the max principal is approved and available whenever the borrower needs it
-Interest rate is usually a variable rate
-Monthly repayment
-Open for a set period of time
Lines of credit
What is the most common source of loan?
Debt loans
