Strategic Financing Decisions in Financial Management

Question 1

Factors influencing the financing choice, including immediacy of financial need, size of need, duration, and incentive effects of different financing structures.

Answer 1

Financing choice factors

Question 2

Explaining why planning yields more financing alternatives and less expensive ones compared to immediate financial need.

Answer 2

Planning and financing

Question 3

The role of collateral, relationships, and reputations in affecting available financing.

Answer 3

Collateral in financing

Question 3

How financial distress affects the availability of financing options.

Answer 3

Financial distress impact

Question 4

Financing arrangements like strategic partnering and franchising, with their advantages and disadvantages.

Answer 4

Relational financing

Question 5

The negotiation process in financing involving parties with different incentives to complete a deal quickly or to slow negotiations.

Answer 5

Financing negotiation

Question 6

Avoiding financing missteps when dealing with market downturns.

Answer 6

Market downturns

Question 7

When prospective investors agree on a venture’s prospects, external financing is preferred over financing by the entrepreneur.

Answer 7

External financing preference

Question 8

Financing that shifts risk to the investor increases the value of the entrepreneur’s claim when the entrepreneur and investor have symmetric expectations about future prospects.

Answer 8

Risk shifting in financing

Question 9

Considering the value of monitoring and advisory functions in financing decisions.

Answer 9

Monitoring and advisory functions

Question 9

How a venture’s taxable status affects financing choices.

Answer 9

Taxable status impact

Question 10

Considering costs and benefits of subsidized financing options like SBA loans.

Answer 10

Subsidized financing

Question 11

Assessing the potential for value creation through staging in financing decisions.

Answer 11

Value creation through staging

Question 12

Four critical questions linking financial needs to the choice of financing, including immediacy, size, permanence, and relation to cumulative need.

Answer 12

Critical financing questions

Question 13

Assessing the current stage and condition of the venture, considering development stage, outside advice, and asset base.

Answer 13

Venture development stage assessment

Question 14

Considering the benefits of active involvement of an outside investor and assessing if the potential benefit outweighs the additional ownership cost.

Answer 14

Value of outside advice in financing

Question 14

Financing characteristics at the seed/start-up stage, involving equity from founder, friends, family, and potential access to outside capital.

Answer 14

Seed/Start-up Stage financing

Question 14

Financing characteristics at the early-growth stage, with low but rapidly growing revenue, some tangible assets, and options for growth capital.

Answer 14

Early-Growth Stage financing

Question 15

Financing characteristics at the late-stage/expansion phase, with revenue growth slowing, significant assets, positive cash flow, and potential sources of equity and debt.

Answer 15

Late-Stage/Expansion financing

Question 16

Can add value by helping overcome investor concern about the entrepreneur taking advantage of the financing relationship and enhancing flexibility to discern the true reasons for failure.

Answer 16

Monitoring

Question 17

A viable choice if assets are available to secure the loan, making adverse selection and moral hazard less likely, but the secured lender may have little interest in the venture’s success.

Answer 17

Debt

Question 18

The entrepreneur’s willingness to be bound by them signals confidence in the venture.

Answer 18

Loan Covenants

Question 19

Sources should require little negotiation, with limited equity funding options for start-up ventures, and established firms can generate funds quickly from operations.Immediate Financing Needs

Answer 19

Immediate Financing Needs

Question 20

Choices may limit flexibility, such as pledging assets as collateral or stretching payables, with factors like amount needed and permanency influencing decisions.

Answer 20

Near-Term Financing Needs

Question 21

Lower than equity, but recurring; debt limits flexibility more than equity.

Answer 21

Issuance Costs for Debt

Question 22

Long-term impact is less if operating cash flow will soon be sufficient, and financing decisions should not impede future capital raising.

Answer 22

Cumulative Financing Needs

Question 23

Different from high-risk start-ups due to prior failure and financial structure assumptions; bankruptcy may be necessary.

Answer 23

Turnaround Financing

Question 24

Include resignation of key employees, supplier relationships deterioration, and loss of customers; financing choices should avoid high distress costs.

Answer 24

Financial Distress Costs

Question 25

An intangible asset that can lose value if the entrepreneur exploits a financing source; relationships provide private information but may not reduce costs.

Answer 25

Reputation in Financing

Question 26

Caused by failure to achieve milestones or market-wide valuations decline; deal structures can impede new funding, so keep early rounds simple.

Answer 26

Down-Round Financing

Question 26

A response to difficulty in negotiating financial restructuring for additional funding; involves repurchasing public equity to take the company private.

Answer 26

Going Private

Question 26

Both parties aim to complete deals quickly, but delays can provide additional information for the investor; financing takes time, but beware of opportunism.

Answer 26

Investor’s Perspective on Timing

Question 27

Factors like venture stage, financial condition, need immediacy, and existing arrangements influence funding options, linked to organizational structure and affected by reputation and relationships.

Answer 27

Choice of Financing