Week 8: Entrepreneurial Finance Flashcards
What are the pros of debt
- Nondilutive
- Defined cost
- Predictable repayment
- Comparatively plentiful
- Known qualifications
What are the pros of Equity
- Features undefined repayment
- Allows for partner, expertise
- May be only option in early stages
- Can be more timely
- Possesses fewer complications, qualifications
- Can reward intangibles
- Improves leverage ratios
What are some common misconceptions about debt and equity?
Debt/equity is too restrictive, too costly
You should never give up ownership percentage
You can calculate the exact cost of debt/equity
You’ll grow to fast/slow with debt/equity
When choosing between debt and equity, what should you consider?
- Growth expectations
- Company’s stage in life cycle
- Industry
- Provider of funding
- Availability of alternative options
- What provider can deliver in addition to funding
- Present and future collateral
What is bootstrapping?
The ability to delay, eliminate, or reduce the need for funding.
Finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or other means.
What are the cardinal rules of bootstrapping?
Never buy new what can be bought second-hand Never buy what can be rented Never rent what can be borrowed Never borrow what can be begged Never beg what can be salvaged
What are some other bootstrapping techniques?
Retain funds internally Delay and extend payables Shorten receivables Sell assets Consider factoring Reinvest income
What are the two classes of collateral?
Real Property: Real estate
Personal Property: Accounts receivable, equipment, inventory, furniture, and fixtures, and general intangibles
What are some emerging trends in lending?
Crowdfunding: donation-based (avoid as an initial funding source)
Microlending
True peer-to-peer
E-lenders
SBA Loan Info
Guarantees as much as 85% of loans up to $150k and 75% of loans above that
Can be used for almost any legitimate business purpose
Preparation Checklist
Historical financial results -more the better -CPA-prepared financials Business plan -pro-forma financials for the next 3-5 years -Cash flow projections -Capital infusions -Planned capital expenditures -Industry and market review -Competition review Financial Sensitivity modeling -Base case -Worst Case -Best case
Financier meeting notes
- Be prepared to make a formal proposal
- Be prepared to hear “no”
- Be flexible
- Identify commonality of financial interest
- Have backup plans
- Ask questions if you don’t understand something
- Convince financer that you know your stuff
Due diligence: Discussion Topics
- Company management
- Marketplace
- Product or service
- Business model
Due Diligence: Management
Who are the founders and what is their experience or background
Do they have relevant experience?
How well do the individuals function as a team
Do they have a track record of success
What critical resources do that have access to
How well do they evaluate risk
Do they have good plan to mitigate identified risk
Are they detailed oriented
Do they exhibit capacity for sustained effort
Due diligence: Market
Who are the users of the product and how many of them are there
What are drivers that are fueling growth
How is the company positioned against competitive threats?
Can competition be described?
Is customer, supplier, and or competition fragmented?
Are there attractive substitutes (Next Best Alternative)
What regulations govern this marketplace
What are the barriers to entry
What is distribution channel and who controls it
What are market boundaries
