Chapter 12 Packet notes- Test 3 Flashcards Preview

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Flashcards in Chapter 12 Packet notes- Test 3 Deck (62):
1

  • Spontaneous Financing 
  • External financing 
  • Profit retention 

Basic Types of Financing: Sources of Financing

2

  • Firms economic potential 
  • Company size and maturity 
  • Types of assets
  • Owner preferences for debt or equity

Factors that Determine Financing

3

Growth prospects and long-term profitability 

Firm's Economic Potential

4

Life-cycle position in business (beginning or mature).

Company Size and Maturity

5

Tangible or intangible.

Types of Assets

6

Tradeoffs required for debt and equity.

Owner Preferences for Debt or Equity

7

  • Voting control: owners must share control with other equity investors who buy the stock or make a large investment.
  • Financial Risk: Lower
  • Protential profitability: Lower potential return on investment for the owners.

High Equity and Low Debt Financing

8

  • Voting control: Owners maintain control without having to make a large investment.
  • Financial risk: Higher
  • Potential Profitability: Higher potential return on investment for the owners.

High Debt and Low Equity Financing

9

  • Return on assets
  • Return on equity

Debt or Equity Financing?

10

  • Rate of return earned on a firm's total assets invested.
  • Computed as operating income divided by total assets

Return on Assets

11

  • Rate of return earned on the owner's equity investment.
  • Computed as net income divided by owner's equity investment.

Return on Equity

12

  • Personal savings
  • Friends and family
  • Other individual investors
  • Venture capital firms
  • Large corporations
  • Public sale of stock

Equity

13

  • Friends and family
  • Other individual investors
  • Commercial banks
  • Business suppliers
  • Asset-based lenders
  • Government-sponsored programs
  • Venture capital firms
  • Community-based financial institutions
  • Large corporations

Debt

14

  • Personal savings
  • Family and friends
  • Credit cards

Three Sources of Financing (Sources Close to Home)

15

Owner equity is expected by other investors.

Personal Savings

16

Borrowing puts personal relationships at risk.

Family and Friends

17

Provides easy access to funds and assets; cards should be a method of payment and not a source of credit.

Credit Cards

18

  • Line of credit
  • Term loans
  • Mortgages

Types of Loans

19

An informal agreement between a borrower and a bank as to the maximum amount of funds the bank will provide at any one time.

  • Revolving Credit Agreement

Line of Credit

20

A commitment by a bank to lend up to a maximum amount.

Revolving Credit Agreement

21

Money loaned for a 5-10 year term, corresponding to the length of time the investment will bring in profits.

  • generally used to finance equipment

Term Loans

22

Two types which represent a long-term source of debt capital:

  • Chattel
  • Real Estate

 

Mortgage

23

A loan or which items of inventory or other moveable property serve as collateral.

Chattel Mortgage

24

A long-term loan with real property held as collateral.

Real Estate Mortgage

25

  • How much the bank will earn on the loan
  • What is the likelihood that the lender will be able to repay the loan?

Banker's Concerns

26

  1. Character of the borrower
  2. Capacity of the borrower to repay the loan
  3. Capital invested in the venture by the borrower
  4. Conditions of the industry and economy
  5. Collateral available to secure the loan

The Five C's of Credit

27

  • Do the purpose and amount of loan make sense, both for the bank and for the borrower?
  • Does the borrower have strong charcter and reasonable ability?
  • Does the loan have a certain secondary source of repayment?
  • Does the loan have a certain primary source of repayment?
  • Can the loan be priced profitabily to the customer and to the bank, and are this loan and the relationship good for both the customer and the bank?
  • Can the loan be properly structured and documented?

Lender's Questions

28

  • How much money is needed?
  • What is the venture going to do with the money?
  • When will the money be needed?
  • When and how will the money be paid back?

Banker's Concerns

29

  • Three years of the firm's historical statements
  • The firm's pro forma financial statements
  • Personal financial statements

Financial Information Required for a Bank Loan

30

Balance sheets, income statements, and statements of cash flow.

Three Years of the Firm's Financial Statements

31

  • Reports that show the firm's financial condition
  • The timing and amounts of the debt repayment included as part of the forecasts.

The Firm's Pro Forma Financial Statements

32

The borrower's personal net worth (assets-debts) and estimated annual income.

Personal Financial Statements

33

  • Prime rate
  • LIBOR
  • Fixed Interest Rates
  • Floating Interest Rates

Negotiating a Loan: Interest Rate

34

Interest rate charged by a commercial bank on loans to its most creditworthy customers.

Prime Rate

35

Interest rate charged by London banks on loans to other London banks.

LIBOR (London InterBank Offered Rate)

36

Interest rate remains the same for the term of the loan.

Fixed Interest Rate

37

Interest rate varies with the changes in the prime rate.

Floating Interest Rate

38

  • Loan maturity date
  • Repayment schedule
  • Loan covenants

Negotiating a Loan

39

Maturity rate shoud match use of funds.

Loan Maturity Date

40

  • Equal monthly or annual payments
  • Decreasing monthly or annual payments

Repayment Schedule

41

Bank imposed restrictions on a borrower that enhance the chances of timely payment.

  • Financial statements
  • Loan use restrictions and salary limits
  • Equity requirements
  • Personal guarantees by borrower

Loan Covenants

42

Supplier provided financing of inventory to a company, which sets up an account payable for the amount.

  • Short-duration financing (30 days)
  • Amount of credit available depends on type of firm and suppliers willingness to extend credit.

Accounts Payable (Trade Credit)

43

  • Installment loan
  • Equipment leased from a supplier

Equipment Loan and Leases

44

From the seller of machinery purchased by a business.

Installment Loan (Mortgage on Equipment)

45

  • Frees up cash for other purposes
  • Leaves lines of credit open
  • Provides a hedge against obsolescence

Equipment Leased from a Supplier

46

A line of credit secured by working-capital assets.

  • Factoring
  • Purchase-order financing

Asset-Based Lending

47

Obtaining cash by selling accounts receivable to factor at discount to invoice value.

  • Factor can refuse questionable accounts
  • Factor charges fees for servicing accounts and for amount advanced to firm prior to collection.

Factoring

48

Lender advances the amount of the borrower's cost of goods sold for a specific customer order.

Purchase-Order Financing

49

  • Business angels
  • Informal Venture Capital
  • Formal Venture Capitalists

Private Equity Investors

50

51

Private individuals who invest in others' entrepreneurial ventures.

Business Angels

52

Funds provided by wealthy private individuals (business angels) to high-risk ventures.

Informal Venture Capital

53

Individuals who informed limited partnerships for the purpose of raising venture capital from large industrial investors.

  • The firm's expected profits in future years
  • The venture capitalist's required rate of return.

Formal Venture Capitalists

54

  • Small Business Administration (SBA) loans
  • State and local government assistance
  • Community-based financial institutions

The Government

55

  • The 7 Guaranty Loan program
    • SBA guarantees repayment of loan to lender.
  • The Certified Development Company (CDC) 504 Loan Program
  • The 7(m) Microloan Program
  • Small Business Investment Companies (SBICs)
  • Small Business Innovative Research (SBIR)

Small Business Administration (SBA) Loans

56

  • Loan guarantees help to lower down payment
  • Focus on enhancing specific industries of facilitating certain community goals.

State and Local Government Assistance

57

Lenders that provide financing to small business in low-income communities for the purpose of encouraging economic development.

Community-Based Financial Institutions

58

  • Large corporations
  • Stock sales

Where Else to Look

59

Provide financing and technical assistance to critical suppliers and technology developers.

Large Corporations

60

  • Private placement
  • Initial public offering (IPO)

Stock Sales

61

The sale of a firm's capital stock to selected individuals.

Private Placements

62

The issuance of stock that is to be traded in public financial markets.

  • Places firm under SEC securities regulations

Initial Public Offering (IPO)