978-0134741086 Chapter 15 Part 2

Unlock access to all the studying documents.

View Full Document

o Capital Access Programs (CAPs) is a state lending program that

encourages lending institutions to make loans to businesses that do not

quality for traditional financing because of their higher risk.

o Revolving loan funds is a a program offered by communities that combine

private and public funds to make loans to small businesses, often at below–

market interest rates.

o Community development financial institutions (CDFIs) are community-

based financial institutions that designate at least a portion of their loan

portfolios to otherwise “unbankable” business owners and aspiring

entrepreneurs.

Other Methods of Financing LO 7

Factoring Accounts Receivable.

A factor is a financial institution that buys a business’s accounts receivable at a discount.

Leasing.

Companies have the option of leasing any kind of asset rather than purchase these assets.

A merchant cash advance is an arrangement in which the provider of the merchant cash

advance prepurchases credit and debit card receivables at a discount.

Peer–to-peer Lending.

Peer-to-peer loans are web-based vetting platforms that create an online lending

community of investors who provide funding to creditworthy small businesses. Examples

credit cards. Credit cards may be the entrepreneur’s only choice for financing.

Advantages of credits cards include: source of easy-to-access funds that is quickly

available; flexible repayment options; attractive short-term alternative to financing.

Chapter 15, Page 248

Disadvantages of using credit cards include: high interest rates, particularly expensive to

use to get access to cash versus making purchases, and can be difficult to get out of the

pattern to use for financing operating expenses.

Conclusion

Entrepreneurs use both debt and equity as source of capital, and must understand the

advantages and disadvantages of each of the many available sources as they relate to their

particular business. Start–ups have the most difficulty finding financing, while well–

established small businesses have a somewhat easier time. The Great Recession made it

difficult for even successful entrepreneurs to get financing.

Part 3: Chapter Exercises

You Be the Consultant: “The Never-Ending Hunt for

Financing”

1. Which of the funding sources described in this chapter do you recommend that

Ralph Lucci and Aaron Hoffman consider for financing their businesses? Which

sources do you recommend that they not use? Why? (LOs 1, 2, 3, 4, 5, 6) (AACSB:

Reflective thinking)

Ralph Lucci should consider the SBA Disaster Loan Program, ROBS, friends and family

 Economic Development Administration (EDA).

2. What can entrepreneurs do to increase the probability that bankers will approve

their loan requests? (LO 4) (AACSB: Reflective thinking)

Refer to the Hands on… How To feature on page 504. Entrepreneurs may consider ways

to combat these common reasons for rejection from commercial banks:

3. Work with a team of your classmates to brainstorm ways these entrepreneurs

could attract the capital they need for their businesses. What steps would you

recommend they take before they approach the potential sources of funding you

have identified? (LOs 1, 2, 3, 4, 5, 6) (AACSB: Analytical thinking)

Part 4: Chapter Discussion Questions

15-1. Why is it difficult for most small business owners to raise the capital needed

to start, operate, or expand their ventures? (LO 1)

Lenders recognize that small businesses are at a higher risk level of defaulting on loans, so

15-2. What is capital? (LO 1)

15-3. Define equity financing.

Equity financing represents the personal investment of the owner(s) of the business. The

15-4. What advantage does equity financing offer over debt financing? (LO 2)

The advantages that equity financing offers over debt financing includes:

 The investment does not have to be repaid

15-5. If an owner lacks sufficient equity capital to invest in the firm, what options

15-6. What guidelines should an entrepreneur follow if friends and relatives choose

to invest in her business? (LO 2)

Chapter 15, Page 251

Entrepreneurs should be honest and objective in their presentation of the investment

opportunity and the risks involved. There are no guarantees that the business will be

successful – and it may fail. It is wise to establish a written agreement that addresses the

many “what–if” questions that may arise.

15-7. What is an angel investor? (LO 2)

15-8. Assemble a brief profile of the typical private investor.

They are accredited advisors, often with significant industry experience, who fill a specific

15-9. How can entrepreneurs locate potential angels to invest in their businesses?

(LO 2)

15-10. What types of businesses are most likely to attract venture capital?

Venture capital companies typically invest in high-tech industries such as computer

15-11. What investment criteria do venture capitalists use when screening potential

businesses?

15-12. How does venture capitalist criteria for investing compare to the typical

angel’s criteria? (LO 2)

Chapter 15, Page 252

and an easy exit strategy. In addition they want an experienced management team, a

competitive advantage, and firms in growth industries.

Angels – Typically purchase 15 to 30 percent ownership in the business, invest $10,000 to

$2 million, are willing to wait seven years or longer to cash out, expect a 20 to 30 percent

return on investment depending on risk. Private investors normally invest during the start–

up or early growth stages.

15-13. How do venture capital firms operate?

15-14. Describe a venture capitalist procedure for screening investment proposals.

15-15. Summarize the major exemptions and simplified registrations available to

small companies wanting to make public offerings of their stock. (LO 3)

The SEC has established simplified registration statements and exemptions from the

registration process: Regulation D, Rules 504, 505 and 506.

35 nonaccredited investors, provide no advertising of the offer, and more has

stringent disclosure requirements.

15-16. What role do commercial banks play in providing debt financing to small

businesses?