Chapter 13
OTHER FINANCING ALTERNATIVES
FOCUS
In this chapter, we consider a variety of government and private sources of new venture
funding. We also consider financing traditionally available only to more mature ventures
including commercial banking loans.
LEARNING OBJECTIVES
LO 13.1: Describe the benefits to entrepreneurs of belonging to business incubators and
seed accelerators.
LO 13.4: Describe reasons why bank debt may not be available to startup ventures.
LO 13.5: Discuss the possible use of credit cards as a source of venture funding.
LO 13.6: Describe possible foreign investor funding sources.
LO 13.7: Discuss the role of the Small Business Administration and identify some of its
programs for assisting small businesses.
CHAPTER OUTLINE
13.1 BUSINESS INCUBATORS, SEED ACCELERATORS, AND
INTERMEDIARIES
13.2BUSINESS CROWDSOURCING AND CROWDFUNDING
13.3COMMERCIAL AND VENTURE BANK LENDING
A. Overview of what the SBA does for Small Businesses
B. Selected SBA Loan and Operating Specifics
13.8 OTHER GOVERNMENT FINANCING PROGRAMS
13.10 DEBT, DEBT SUBSTITUTES, AND DIRECT OFFERINGS
A. Vendor Financing: Accounts Payable and Trade Notes
SUMMARY
APPENDIX A:
Summary of Colorado Business Financial Assistance Options
DISCUSSION QUESTIONS AND ANSWERS
1. What are business incubators and seed accelerators? How do they differ?
A business incubator is an organization that helps startup companies develop by
providing management, operating, and financial services.
2. What is meant by the terms business crowdsourcing and crowdfunding?
Business crowdsourcing is the process of obtaining business ideas, development
3. Describe the two major types of crowdfunding.
There are two types of crowdfunding: rewards-based crowdfunding and equity
4. What are the five C’s of Credit Analysis?
The five C’s of credit analysis are capacity, capital, collateral, conditions, and
5. Name three of the common loan restrictions and explain their relation to new
venturing financing. What are some additional common loan restrictions?
While many different restrictions can be placed on businesses, a few are described
6. What is meant by venture banks? How do they differ from traditional commercial
banks?
The term “venture banks” refers to a type of debt investor (lender) that will consider
lending to early stage ventures that do not have proven cash flows. They typically
7. Why are new ventures at a disadvantage in receiving debt financing?
They are at a disadvantage because they usually do not have large amounts of assets
8. Why is credit card financing attractive to entrepreneurs? What are the risks?
It is attractive because it is quite easy to obtain and also provides interest rates lower
9. What is the EB-5 immigrant visas program?
The Immigration and Nationality Act (INA) of 1990 provided an opportunity for
foreign nationals to obtain a “green card” through the EB-5 immigrant visas program.
10. What is the Small Business Administration (SBA), when was it organized, and what
was its purpose?
The SBA is the Small Business Administration which was created by Congress in
11. Identify and briefly describe four basic SBA credit programs.
Refer to Figure 13.3. The four basic SBA credit programs:
1) 7(a) Loan: can be used for most business purposes including the financing of
working capital (up to $5,000,000).
12. Compare the characteristics in terms of loan amounts, lenders, and SBA role in 7(a)
loans versus 504 loans.
Refer to Figure 13.3.
13. What is a Small Business Investment Company (SBIC)?
SBIC stands for Small Business Investment Company and is a private, for-profit
14. What types of advisory services are available from the SBA?
The SBA provides advisory services (including technical, financial, and contracting)
15. What is a debt guarantee and how does the SBA back a small business loan?
A debt guarantee is an assurance that a certain portion of the debt principal (and/or
16. In which research areas does the SBA provide supplemental programs?
Refer to Section 13.7. The SBA provides technical assistance, financial assistance,
contracting assistance, disaster assistance recovery, supports special interests,
17. What are some characteristics of a Community Development Financial Institutions
(CDFI) loan?
In 1994, Congress created the Treasury Department’s Community Development
18. What are factoring and receivables lending?
Factoring is selling receivables to a third party at a discount from their face value in
19. Describe examples of customer funding used to reduce financing needs.
Depending on the type of business venture, funds from customers may be used to
help finance startups. Several models or approaches may be considered by
entrepreneurs.
20. What is venture leasing? How does it differ from traditional leasing?
Venture leasing involves leasing assets to high-growth ventures typically backed by
21. What is a direct public offering?
A direct public offering is a security offering made directly to a large number of
22. From the Headlines – Solix: Describe the alternative financing Solix arranged for
the launch of its biofuels production facility. Comment on your impressions of what
attracted the investors.
Answers will vary: Solix’s technology and development were initially subsidized by
Colorado State University and government grants. Then, to produce its large-scale
INTERNET ACTIVITIES
1. Locate your state’s small business credit facilitation web page. Describe the
resources you state makes available in broad categories.
Web-researched results will vary due to constant updating of the related web sites.
EXERCISES/PROBLEMS AND ANSWERS
1. [Bank Loan Considerations] Assume you started a new business last year with
$50,000 of your own money that was used to purchase equipment. Now you are
seeking a $25,000 loan to finance the inventory needed to reach this year’s sales
target. You have agreed to pledge your venture’s delivery truck and your personal
automobile as support for the loan. Your sister also has agreed to cosign the loan.
During your initial year of operation, you paid your suppliers in a timely fashion.
A. Analyze the loan request from the viewpoint of a lender who uses the “five Cs” of
credit analysis as an aid in deciding whether to make loans.
B. Assume you are currently carrying an accounts receivable balance of $10,000. How
might you use accounts receivables to obtain an additional bank loan?
You could approach a bank with the receivables and your track record of
collections and ask if they could be collateral for a loan. You could also contact a
factor and see if you could “sell” the receivables for cash.
C. Assume at the end of next year, you will have an accounts receivable balance of
$15,000 and an inventories balance of $30,000. If a bank normally lends an amount
equal to 80 percent of accounts receivable and 50 percent of inventories pledged as
collateral, what would be the amount of a bank loan a year from now?
2. [Factor Financing] Assume the operation of your business resulted in sales of $730,000
last year. Year-end receivables are $100,000. You are considering factoring the
receivables to raise cash to help finance your venture’s growth. The factor imposes a 7
percent discount and charges an additional 1 percent for each expected ten-day average
collection period over thirty 30 days.
A. Estimate the dollar amount you would receive from the factor for your receivables if
the collection period was thirty 30 days or less.
C. Show how your answer in Part B would change if the factor charges an 8 percent
discount and charges an additional .5 percent for each expected fifteen-day average
collection period over thirty days.
D. If the $730,000 in sales last year were evenly distributed throughout the year, an
average $100,000 in receivables outstanding would imply what average collection
period? Given the original terms stated in the problem, what dollar amount would you
expect to receive for your receivables?
Recall from Chapter 5 that the average collection period is also referred to as the days
MINI CASE: JEN AND LARRY’S FROZEN YOGURT COMPANY (Revisited)
In 2019, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry’s Frozen Yogurt
Company, which was based on the idea of applying the microbrew or microbatch strategy
to the production and sale of frozen yogurt. Jen and Larry began producing small
quantities of unique flavors and blends in limited editions. Revenues were $600,000 in
2019 and were estimated at $1.2 million in 2020.
An investment in bricks and mortar was necessary to make and sell the yogurt. Initial
specialty equipment and the renovation of an old warehouse building in lower downtown
(known as LoDo) of $450,000 occurred at the beginning of 2019 along with $50,000
A. How much net profit, before any financing costs, is the venture expected to earn in
2020? What would be the net profit if sales reach $1.5 million? What would be the
net profit if next year’s sales are only $800,000?
Note: Cost of goods sold is: $1.50/$3.00 per unit = 50% of sales.
Note: a venture’s profits can be measured in a number of different ways: before interest
and taxes (EBIT); net profit (or income) after financing and taxes; or net operating profit
after taxes (NOPAT) calculated as EBIT times (1 – tax rate).
Profit Measures:
EBIT $170,000 $320,000 -$30,000
B. If inventories are expected to turn over ten times a year (based on cost of goods
sold), what will be the venture’s average inventories balance next year if sales are
$1.2 million? How much might the venture be able to borrow if a lender typically
lends an amount equal to 50 percent of the average inventories balance? If the
borrowing rate is 12 percent, how much dollar amount of interest would have to be
paid on the loan?
Recall from Chapter 6 the discussion of the “inventory–to–sale conversion period”
C. How might the venture acquire and finance the new equipment that is needed?
Leasing and secured equipment lending are possibilities.
D. Identify potential government credit resources for the venture.
As co-owner, Jen may qualify for SBA and other special financing. Given the
E. Prepare a summary of the benefits and risks of Jen and Larry’s continued use of
credit card financing.
While credit cards may appear inexpensive and readily available, managing teaser
F. Prepare a summary of how the venture might benefit from receivables financing if
commercial customers are extended credit for thirty days on their purchases.
Jen and Larry are operating a retail business and are not likely to have receivables
G. Discuss the impact of potential loan restrictions should the venture seek commercial
loan financing.
It is likely that Jen and Larry will have to maintain and provide (to the lender)
H. Comment on how the venture might be evaluated in terms of the five C’s of credit
analysis.
Capacity to pay: Jen and Larry have past revenues and a demonstrated ability to
produce profits. Their capacity to pay appears to be reasonable. Depending on
their continued ability to produce profits and their expansion plans, their ability to
pay may vary.