Term
| What are the two basic types of Financing |
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Definition
*Spontaneous dept financing
*External Financing |
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Term
| What are the factors that determine sources of financing |
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Definition
*A business economic potential
*Company size and maturity
*Nature of business's assets
*Owner preferences for debt or equity |
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Term
| Describe the Return on Assets |
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Definition
*Rate of return earned on a business’s total assets invested
*Computed as operating income ÷ total assets |
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Term
| Describe the return on Equity |
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Definition
*Rate of return earned on the owner’s equity investment
*Computed as net income ÷ owner’s equity investment |
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Term
| What are the outcomes of using less debt and more equity |
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Definition
*Lower return on owners' equity investment
*Less financial risk
*Owners share control with new investors |
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Term
| What are the outcomes of using more debt and less equity |
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Definition
*Higher potential return on owners 'equity investment
*More financial risk
*Owners do not have to share control with new investors |
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Term
| What are the sources of early financing |
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Definition
*Personal savings
*Family and friends |
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Term
| Sources of Funds that fall under Equity |
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Definition
*Personal savings
*Public sale stock |
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Term
| Sources of Funds that fall under Debt |
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Definition
*Family and friends
*Commercial banks
*Business suppliers
*Asset based lenders
*Government-Sponsored programmes |
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Term
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Definition
*Mortgages
*Chattel
*Real estate |
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Term
| Five C's that describes the foundation of getting a loan |
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Definition
*Borrower's Character
*Capacity to repay the loan
*Owner capital invested in the business
*Collateral to secure the loan
*Industry and economic conditions |
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Term
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Definition
| Interest rate charged by a commercial bank on loans to its most creditworthy customers |
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Term
| Describe JIBAR (Johannesburg Interbank Agreement Rate) |
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Definition
| The interest rate on loans that South African-based banks charge other banks in South Africa |
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Term
| Describe the Fixed interest rate |
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Definition
| Interest rate remains the same for the term of the loan |
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Term
| Describe the floating interest rate |
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Definition
| Interest rate varies with the changes in the prime rate |
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Term
| Describe the loan maturity date |
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Definition
*Maturity date matched to use of funds
*Depends on whether short term (1 yr) or long term |
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Term
| Describe the Repayment Schedule |
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Definition
*Equal monthly or annual payments
*Decreasing monthly or annual payments
*Balloon payment – to pay the loan off in full at a specified time rather than waiting the full term for the loan to be repaid |
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Term
| Describe the Loan Covenants |
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Definition
*Bank-imposed restrictions on a borrower
-Financial statements – monthly basis or quarterly +
-Loan use restrictions and manager’s salary limits -
-Equity requirements – assets must be two times more than liabilities or bank might limit amount of debt the business can borrow in the future -
-Personal guarantees by borrower – bank wants the right to use both business’s assets and the owner’s personal assets as collateral –
-Know what is required from you before you borrow |
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Term
| Describe Trade payables (Trade credit) |
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Definition
Supplier-provided financing of inventory to a business, which sets up an account payable for the amount.
*Short-duration financing (30 days)
*Amount of credit available depends on type of business and supplier’s willingness to extend credit |
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Term
| Describe Equipment loan and Leases |
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Definition
*Installment loan (mortgage on equipment) from the seller of machinery purchased by a business and requires a deposit (3 – 5 yrs)
*Equipment leased from a supplier:
-Frees up cash for other purposes
-Leaves lines of credit open
-Provides a hedge against obsolescence |
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Term
| Describe the Asset-Based Lending |
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Definition
*A line of credit secured by working-capital assets (trade receivables, inventory or both)
*Factoring:
-Obtaining cash by selling trade receivables to another business - 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 business prior to collection.
-Interest charged may range from 2 to 3 percent above prime rate |
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Term
| Describe Purchase order financing |
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Definition
*Obtaining cash from a lender who, for a fee, advances the amount of the borrower’s cost of goods sold for a specific customer order
*This type of financing attempts to address the issue of a company growing so rapidly that cash flow can’t sustain growth
*A business owner can get financing for the entire amount if he/she gets a signed purchase order from a creditworthy customer
*In times when credit is scarce, this is an opportunity to leverage the ability to sell the product |
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Term
| Fastest growing sources of financing |
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Definition
*Business Angels
Private individuals who invest in others’ entrepreneurial ventures.
*Informal Venture Capital
Funds provided by wealthy private individuals (business angels) to high-risk ventures
*Formal Venture Capitalists
Individuals who form limited partnerships for the purpose of raising venture capital from large institutional investors
They evaluate high potential start-ups and existing businesses |
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Term
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Definition
*The process of raising very small investments from a large number of investors through online platforms.
*Approaches to Crowdfunding
-4 basic Nonequity funding: donations, rewards, pre-purchases (provides investors with equity ownership in the business)
-Equity investing by accredited investors |
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Term
| Issues associated with the Crowdfunding investment |
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Definition
*Voting rights for initial investors reduces attractiveness to venture capitalists.
*Revelation of confidential and competitive information to crowdfunding investors |
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Term
| Three types of equity based crowdfunding |
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Definition
1. allows accredited investors to view private opportunities on a password- protected site
2. allows entrepreneurs to solicit funding publicly and raise unlimited funding
3. allows unaccredited investors to invest online |
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Term
| Define the term “Crowdfunding” and identify the four basic approaches to crowdfunding. |
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Definition
Crowdfunding - the process of raising very small investments from a large number of investors through online platforms.
Approaches
o Donations
o Rewards
o Pre-purchases
o Equity investing |
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Term
| Explain the two qualities required by aspiring entrepreneurs in order to get a business up and running and describe how a business’s characteristics affect its available financing sources. |
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Definition
•Two qualities required by aspiring entrepreneurs are: persistence and discipline
•Characteristics of a business
o The business’s economic potential
o The size and maturity of the business
o The nature of its assets
o The personal preferences of the owners with respect to the trade-offs between debt and equity |
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Term
| Define the term “Business Angels” and discuss four suggestions about dealing with business angels according to Guy Kawasaki |
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Definition
Private individuals who invest in others’ entrepreneurial ventures.
Four suggestions:
• Make sure the investors are accredited
• Make sure they’re sophisticated – been there, done that
• Don’t underestimate them – they invest their own money
• Understand their motivation – they want to help entrepreneurs
• Enable them to live vicariously – through the entrepreneurs' efforts. They want to relive the thrills of entrepreneurship
• Make your story comprehensible to the angel’s spouse – decision-making committee consists of one person and a spouse. There will be questions that need to be answered
• Sign up people whom the angel has heard of – angels are motivated by the social aspect of investing with buddies in start-ups run by bright people who want to change the world
• Be nice – they fall in love with entrepreneurs that remind them of their children the never had |
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