Chapter 11 Seek Scalable Debt Flashcards
(25 cards)
What types of debt can limit business growth?
Amortizing loans that require principal repayment
These loans can reduce available capital for reinvestment.
Why do typical high-growth ventures in Silicon Valley avoid using debt?
Debt needs to be repaid from cash flow, which limits cash for reinvestment
They focus on dominating their industries rather than maintaining positive cash flow.
What is a line of credit?
A flexible financing source allowing continuous borrowing based on asset levels
Repayment is based on meeting loan covenants.
How did Joel Ronning use a line of credit?
He built a $40 million venture with a $40,000 investment, borrowed via a credit card
He sold directly to consumers to manage cash flow.
What is a transaction loan?
A short-term loan made for a specific purpose, repaid after the purpose is achieved
Relies on collateral or cash flow from the project.
How did Gary Holmes fund his real estate projects?
By funding each project separately with equity partners and securing loans based on leases
He developed plans and signed leases with anchor tenants.
What is the advantage of leasing over purchasing?
Leasing allows use of equipment without a down payment and improves cash flow
Useful for financing fixed assets like real estate.
What is trade credit?
A form of financing where the cost is built into the price of products or services
Establishing credit with suppliers can reduce financing needs.
How did Dick Schulze leverage trade credit?
By obtaining extended terms for inventory and paying suppliers on time
This helped him build Best Buy into a large company.
What is the benefit of customer advances?
They provide working capital for unlimited growth
Particularly effective when combined with trade credit.
What role do asset-based lenders play?
They offer working capital loans secured by inventory and receivables
Typically used when banks are uncomfortable with a loan.
What is the primary service provided by commercial banks?
They offer various financial services, including loans like revolving lines of credit
They prefer businesses with a history of cash flow.
What do sales-finance companies do?
They finance consumer loans directly or via retailers
They enable businesses to sell big-ticket items by offering financing.
What is factoring in business finance?
The process of selling accounts receivable to factoring companies
Factors assume collection risk, which can be beneficial for some businesses.
What is the purpose of Internet-based lending?
To provide funding to small and midsized businesses through online platforms
Includes crowd-sourcing and P2P lending.
What is development finance?
Financing provided by local, state, and federal governments to support small businesses
Typically below-market-rate financing with easier criteria.
What is the conclusion regarding scalable debt?
You need cash flow to repay interest and principal, which may not always be possible
In such cases, seeking venture capital may be necessary.
What is required to use scalable debt?
Cash flow to repay interest and principal
This is essential for managing debt obligations effectively.
What should a company do if cash flow to repay debt is not possible in emerging industries?
Grab all the VC you can on reasonable terms
Companies like Uber and Airbnb successfully utilized venture capital in this manner.
Name two companies that successfully used venture capital.
- Uber
- Airbnb
These companies are examples of leveraging VC effectively.
Who are some finance-smart billion-dollar entrepreneurs that utilized scalable debt?
- Sam Walton
- Dick Schulze
- Niraj Jain
- Michael Dell
These entrepreneurs demonstrate the strategic use of debt in business growth.
What was the key to the use of scalable debt by successful entrepreneurs?
They were not handicapped by the use of debt
This allowed them to manage debt costs effectively.
What costs can be associated with scalable debt?
- Interest costs
- Leases
- Cost to the vendor
These costs must be manageable for effective debt utilization.
What forms can debt take when used by successful entrepreneurs?
- Short-term credit (e.g., accounts payable)
- Long-term leases for fixed assets
These forms of debt allow for flexibility in financing.