Chapter 12 - Debt and other forms of financing. In this chapter, students will be able to understand: Figure out how much you need, financing is a continuing activity, align your sources & uses of funds, mature firms enjoy greater access to funds, start with internal funds sources, optimize your cash collection cycle (CCC), obtain working capital from receivables and inventories,...
Trang 1Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
DEBT AND OTHER FORMS
OF FI NANCI NG
Chapt e r 12
1
Trang 2Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Figure out how much you need
q Know the four basic ways to value your business
Ø Earning capitalization valuation
Ø Present value of future cash flows
Ø Market – comparable valuation
Ø Asset-based valuation
q Knowing the value of your business is the first step in figuring out how much you need to get
funded
q These methods offer tangible formulas but often don’t account for Risk, Opportunity, etc… 2
Trang 3Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Financing is a continuing activity
q Factors within, and outside of, your control impact your cash needs & can change suddenly
q Cash needs must be frequently forecasted with a margin of error
Ø Plan for the most likely case
Ø Be prepared for the worst case (maintain access
to a reserve)
q Remember the 3 “Rules of Cash”
Ø More cash is better than less cash
Ø Cash now is better than cash later
Ø Never run out of cash (#1 killer of new ventures!)
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2017 ©
Align your sources & uses of funds
q Uses of funds
Ø Start-up costs
Ø Working capital
Ø Growth
q Sources of funds (cash flow)
Ø External
• Require external analysts or investors to independently appraise the worthiness of capital investments before releasing funds
Ø Internal
• Funds you control directly & absolutely
§ Forecast uses of funds further out than the time required to secure sources of funds
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2017 ©
Mature firms enjoy greater access to funds
FIRM MATURITY
INTERNAL SOURCES OF FUNDS
EXTERNAL SOURCES OF
FUNDS
Trang 6Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Start with internal funds sources
q Home equity lines of credit
Ø Interest rates are comparatively low
Ø Better for mid to longer term debt
q Credit cards
Ø Higher interest rates
Ø Miles/points may be available
Ø Better for short term debt to minimize cost of capital
q Use personal funds to “de-risk” your venture
Ø Confirm/deny market demand
Ø Confirm/deny your value proposition
q Create conditions needed to access other fund types
Trang 7Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Optimize your cash collection cycle (CCC)
q Ideal - a negative cycle
Ø Customer pays you before
you pay suppliers
Ø Highest liquidity
q Next best – Customers pay
cash, you pay credit
Ø Influenced by industry norms
q Optimize your CCC
Ø Extend payables
Ø Shorten receivables
Ø Minimize inventory costs
Trang 8Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Obtain working capital from
receivables and inventories
q New working capital doesn’t equal liquidity
q Some working capital is tied up in operating assets
q Operating assets can be liquidated prematurely at
a cost, if no other sources of funds exist
Trang 9Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Obtain working capital from receivables by adjusting…
q the pattern of your sales
ü Forecast sales to plan working
capital
q the ratio of cash vs credit
ü Credit vs credit cards vs
cash
q your terms for credit sales
ü A competitive factor within
industries
ü Consider demand elasticity
ü Length of payment &
discounts
q your way of enforcing your credit
terms
ü Cutting off vs cash-only vs
collection agencies vs legal recourse
Trang 10Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Increase payables & decrease receivables for short term cash
q Receivables secure a bank
loan
q Maximize existing trade
credits
q Negotiate extended trade
credits
q Use seasonal trade credits
q Emphasize cash sales
q Accept credit cards
Trang 11Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Get short term cash from banks
by financing receivables
q Pledging
Ø Receivable become collateral
Ø Loan is given for a percentage of collateral full value
q Pledging with notification
Ø Customer instructed to pay the lender directly
q Factoring
Ø Sell receivables at a discount to a “factor”
Ø Factor collects receivable payments
q Recourse
Ø Means the factor can still get receivables
payments from your customers don’t pay
Ø Re-course & non-recourse exists
Trang 12Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Obtain working capital with bank loans against inventory
q Chattel Mortgage
qSecured by property assets (i.e “Widget
#2873B4”)
q Floating Lien
qSecured by blanket assets (i.e entire
inventory)
q Field Warehousing
qLender secures your inventory on your
premises
q Public Warehousing
qYour pledged inventory goes to another
warehouse
Trang 13Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
“Finance” working capital
through customer prepayments
q Goes back to the ideal
negative cycle not easy
q Common in large, complex,
long-term projects
q Customers pay ahead in
installments to fund phases of
work until completion
Trang 14Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley,
2017 ©
Obtain Small Business
Administration (SBA) loans
q For those unable to get conventional bank loans
q Government backs loans
Ø 90% under $155,000
Ø Up to 85%, between $155,000 and $750,000 (max.)
q Must be for-profit
q Used for working capital, CAPEX, & line of
credit
q 3:1 Debt-to-equity ratio required
Ø After loan is made
q Use banks that process SBA loan routinely
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2017 ©
Many factors to consider in
acquiring short term bank loans
q Maturity of loans
q Interest rates
q Collateral
q Loan applications
q Restrictive covenants
q General provisions
q Routine provisions
q Specific provisions
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2017 ©
Finance equipment needs
q Non-bank companies charge interest higher than banks
q Collateral (i.e the equipment) must exceed loan balance
q Loan repayment schedule stays ahead of
depreciation schedule
q Conditional sales contracts extend purchase
over 2-5 years
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2017 ©
When selecting the right short-term financing mix, consider…
q your needs
Ø Current
Ø Future
q cost of alternatives
Ø Current
Ø Future
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2017 ©
Plan cash flows & profits
q Profitability vs Solvency
Ø An unprofitable venture can recover…
measure of health
Ø An Insolvent venture ceases to exist because
it cannot pay its’ suppliers (insufficient working
capital)…vital sign
q Profits doesn’t equal cash flow
Ø Some cash transactions do not impact profits
Ø Non-cash transaction do not impact cash flow
q Free cash flow (FCF); matters to bank
loan officers
= Cash from operations (CFO) – capital
expenditures (CAPEX)
q Pretax undedicated cash flow; matter to
acquirers
= FCF + TAX + INTEREST
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2017 ©
Recap
q Working capital doesn’t equal liquidity
q Most of working capital is tied up in operations
q Cash flow forecasts help to determine financing needs
q Manage customer and supplier payments
q Debt options when actual cash doesn’t meet
needs: banks, private placement, leases,
suppliers, government agencies, customers