Strategic Financing Decisions in Financial Management Flashcards
Factors influencing the financing choice, including immediacy of financial need, size of need, duration, and incentive effects of different financing structures.
Financing choice factors
Explaining why planning yields more financing alternatives and less expensive ones compared to immediate financial need.
Planning and financing
The role of collateral, relationships, and reputations in affecting available financing.
Collateral in financing
How financial distress affects the availability of financing options.
Financial distress impact
Financing arrangements like strategic partnering and franchising, with their advantages and disadvantages.
Relational financing
The negotiation process in financing involving parties with different incentives to complete a deal quickly or to slow negotiations.
Financing negotiation
Avoiding financing missteps when dealing with market downturns.
Market downturns
When prospective investors agree on a venture’s prospects, external financing is preferred over financing by the entrepreneur.
External financing preference
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.
Risk shifting in financing
Considering the value of monitoring and advisory functions in financing decisions.
Monitoring and advisory functions
How a venture’s taxable status affects financing choices.
Taxable status impact
Considering costs and benefits of subsidized financing options like SBA loans.
Subsidized financing
Assessing the potential for value creation through staging in financing decisions.
Value creation through staging
Four critical questions linking financial needs to the choice of financing, including immediacy, size, permanence, and relation to cumulative need.
Critical financing questions
Assessing the current stage and condition of the venture, considering development stage, outside advice, and asset base.
Venture development stage assessment
Considering the benefits of active involvement of an outside investor and assessing if the potential benefit outweighs the additional ownership cost.
Value of outside advice in financing
Financing characteristics at the seed/start-up stage, involving equity from founder, friends, family, and potential access to outside capital.
Seed/Start-up Stage financing
Financing characteristics at the early-growth stage, with low but rapidly growing revenue, some tangible assets, and options for growth capital.
Early-Growth Stage financing
Financing characteristics at the late-stage/expansion phase, with revenue growth slowing, significant assets, positive cash flow, and potential sources of equity and debt.
Late-Stage/Expansion financing
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.
Monitoring
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.
Debt
The entrepreneur’s willingness to be bound by them signals confidence in the venture.
Loan Covenants
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
Immediate Financing Needs
Choices may limit flexibility, such as pledging assets as collateral or stretching payables, with factors like amount needed and permanency influencing decisions.
Near-Term Financing Needs
Lower than equity, but recurring; debt limits flexibility more than equity.
Issuance Costs for Debt
Long-term impact is less if operating cash flow will soon be sufficient, and financing decisions should not impede future capital raising.
Cumulative Financing Needs
Different from high-risk start-ups due to prior failure and financial structure assumptions; bankruptcy may be necessary.
Turnaround Financing
Include resignation of key employees, supplier relationships deterioration, and loss of customers; financing choices should avoid high distress costs.
Financial Distress Costs
An intangible asset that can lose value if the entrepreneur exploits a financing source; relationships provide private information but may not reduce costs.
Reputation in Financing
Caused by failure to achieve milestones or market-wide valuations decline; deal structures can impede new funding, so keep early rounds simple.
Down-Round Financing
A response to difficulty in negotiating financial restructuring for additional funding; involves repurchasing public equity to take the company private.
Going Private
Both parties aim to complete deals quickly, but delays can provide additional information for the investor; financing takes time, but beware of opportunism.
Investor’s Perspective on Timing
Factors like venture stage, financial condition, need immediacy, and existing arrangements influence funding options, linked to organizational structure and affected by reputation and relationships.
Choice of Financing
