Chapter 15 Debt Financing Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1...

Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 11Chapter 15 Debt FinancingChapter 15 Debt Financing

Sources of Debt Financing


Debt FinancingDebt Financing

Financing that must be repaid with Financing that must be repaid with interestinterest

SBA: lenders make $600 billion in loans SBA: lenders make $600 billion in loans of less than $1 million to small of less than $1 million to small companies each yearcompanies each year

Total small business borrowing Total small business borrowing approaches $1 approaches $1 trilliontrillion per year per year


Debt FinancingDebt Financing

Is carried as a liability on the company's Is carried as a liability on the company's balance sheetbalance sheet

Can be just as difficult to secure as Can be just as difficult to secure as equity financing, even though sources equity financing, even though sources of debt financing are more numerousof debt financing are more numerous

Can be expensive, especially for small Can be expensive, especially for small companies, because of the risk/return companies, because of the risk/return tradeoff – “prime-plus…”tradeoff – “prime-plus…”


Consider Borrowing Consider Borrowing Money to…Money to… Increase your work force and/or Increase your work force and/or

inventory to boost salesinventory to boost sales Gain market shareGain market share Purchase new equipmentPurchase new equipment Refinance existing debtRefinance existing debt Take advantage of cash discountsTake advantage of cash discounts


Consider Borrowing Consider Borrowing Money to…Money to… Buy the building in which your Buy the building in which your

business is locatedbusiness is located Establish a relationship with a Establish a relationship with a

lenderlender Retire debt held by a “non-Retire debt held by a “non-

relationship” creditorrelationship” creditor Deal with a downturn in businessDeal with a downturn in business


Sources of Debt Sources of Debt CapitalCapital

Commercial banksCommercial banks

85.9%

5.5% 5.1% 3.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Under $100,000 $100,001 to $250,000 $250,000 to $1

million

More than $1 million

Loan Size

Commercial Bank Loans to Small Businessby Loan Size

Source: Source SBA: Banking and SME Financing in the United States, June 2006, http://www.sba.gov/advo/research/rs277tot.pdf.


Commercial Commercial BanksBanks

Lenders of Lenders of firstfirst resort for small resort for small business ownersbusiness owners

SBA study: Banks provide 64.7% of SBA study: Banks provide 64.7% of all traditional debt to small all traditional debt to small businesses businesses

Small banks (<$500 million in Small banks (<$500 million in assets) are most likely to lend money assets) are most likely to lend money to small businessesto small businesses

Focus on a company’s ability to Focus on a company’s ability to generate positive cash flow when generate positive cash flow when evaluating loan proposalsevaluating loan proposals


Commercial Commercial BanksBanks Conservative lendersConservative lenders

Significant owner investmentSignificant owner investment Sufficient cash flow for Sufficient cash flow for

repaymentrepayment Ample collateral as securityAmple collateral as security SBA loan guaranteeSBA loan guarantee Personal guaranteePersonal guarantee


Commercial BanksCommercial Banks

Short-term loans – the Short-term loans – the commercial banks’ commercial banks’ specialtyspecialty Commercial loansCommercial loans Lines of creditLines of credit

...the heart of the financial market for small ...the heart of the financial market for small

businesses!businesses!

How large a line of credit?How large a line of credit?

Example:Example: Average collection period ratioAverage collection period ratio 49 days 49 days + Average inventory turnover ratio+ Average inventory turnover ratio + 53+ 53 days days= Total= Total 102 days 102 days- Average payable period ratio Average payable period ratio - -

3939 days days= Cash flow cycle= Cash flow cycle 63 days63 days

Annual salesAnnual sales $5,800,000 $5,800,000Average daily sales (Annual sales Average daily sales (Annual sales ÷÷ 365 days) 365 days)

$15,890$15,890

Cash Flow cycleCash Flow cycle 63 days63 daysx Average daily salesx Average daily sales x $15,890x $15,890EqualsEquals $1,001,096 $1,001,096- Forecasted profit (Annual sales x net profit margin)- Forecasted profit (Annual sales x net profit margin) - - $377,000$377,000= Line of credit requirement= Line of credit requirement $ $624,096624,096

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall



Short-term loans – the Short-term loans – the commercial banks’ specialtycommercial banks’ specialty Commercial loansCommercial loans Lines of creditLines of credit



Floor planningFloor planning


Intermediate and long-Intermediate and long-term loansterm loans Term loansTerm loans Installment loansInstallment loans Discounted installment Discounted installment

contractscontracts Character loansCharacter loans





Sources of Debt Sources of Debt CapitalCapital Commercial banksCommercial banks Asset-based lendersAsset-based lenders


Asset-Based Asset-Based BorrowingBorrowing

Two common methods:Two common methods: Discounting accounts Discounting accounts

receivablereceivable

AccountsReceivable

Inventory financingInventory financing

Source: Commercial Finance Association

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Mill

ion

s o

f $

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Asset-Based Loans(in Millions of $)


Sources of Debt Sources of Debt CapitalCapital Commercial banksCommercial banks

Trade creditTrade credit Equipment suppliersEquipment suppliers Commercial finance companiesCommercial finance companies Saving and loan associationsSaving and loan associations

Asset-based lendersAsset-based lenders


Sources of Debt Sources of Debt CapitalCapital Stock brokerage housesStock brokerage houses Insurance companiesInsurance companies Credit unionsCredit unions BondsBonds Private placementsPrivate placements Small Business Investment Small Business Investment

Companies (SBICs)Companies (SBICs)

(Continued)(Continued)


Small Business Small Business Investment Companies Investment Companies (SBICs)(SBICs) About 400 SBICs operate in the About 400 SBICs operate in the

U.S.U.S. Use a combination of private Use a combination of private

capital and federally guaranteed capital and federally guaranteed debt to provide long-term capital debt to provide long-term capital to small companiesto small companies

Since 1958, SBICs have provided Since 1958, SBICs have provided more than $48 billion in financing more than $48 billion in financing to 100,000 small companies to 100,000 small companies

Source: SBIC Program Overview, National Association of Small Business Investment Companies, 2007.

SBIC Financing Patterns

Debt20.5%

Debt and Equity28.5%

Equity51.0%



Stock brokerage housesStock brokerage houses Insurance companiesInsurance companies Credit unionsCredit unions BondsBonds Private placementsPrivate placements Small Business Investment Small Business Investment

Companies (SBICs)Companies (SBICs)


Small Business Lending Companies Small Business Lending Companies (SBLCs)(SBLCs)



Economic Development Economic Development Administration (EDA)Administration (EDA)

Department of Housing and Urban Department of Housing and Urban Development (HUD)Development (HUD)

U.S. Department of Agriculture’s U.S. Department of Agriculture’s Rural Business-Cooperative Rural Business-Cooperative ServiceService

Federally Sponsored Programs:Federally Sponsored Programs:



Small Business Innovation Research Small Business Innovation Research (SBIR) (SBIR)

Small Business Technology Transfer Small Business Technology Transfer programsprograms

Small Business Administration (SBA) Small Business Administration (SBA) – largest single backer of small – largest single backer of small businesses in the nationbusinesses in the nation


Federally Sponsored Programs:Federally Sponsored Programs:



Small Business Small Business Administration Loan Administration Loan ProgramsPrograms

SBA has helped 20 million small SBA has helped 20 million small companies acquire the capital they companies acquire the capital they need for start-up and growth need for start-up and growth

SBASBAExpressExpress Program – loan Program – loan guarantees of up to 50% on loans guarantees of up to 50% on loans up to $350,000up to $350,000

7(A) Loan Guaranty Program – the 7(A) Loan Guaranty Program – the most popular SBA loan programmost popular SBA loan program

Source: U.S. Small Business Administration

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

Bill

ion

s o

f $

1976 1980 1984 1988 1992 1996 2000 2004

SBA 7(A) Guaranteed Loans


SBASBAExpressExpress Program Program 7(A) Loan Guaranty Program7(A) Loan Guaranty Program CAPLine ProgramCAPLine Program International Trade ProgramsInternational Trade Programs

Export Working Capital ProgramExport Working Capital Program International Trade ProgramInternational Trade Program



Section 504 Certified Section 504 Certified Development Company ProgramDevelopment Company Program

Microloan ProgramMicroloan Program Average loan is $13,000 with a Average loan is $13,000 with a

maturity of 3 years (Maximum is 6 maturity of 3 years (Maximum is 6 years) years)

37% go to business start-ups 37% go to business start-ups



Prequalification Loan ProgramPrequalification Loan Program Disaster LoansDisaster Loans 8(A) Loan Program8(A) Loan Program



State and Local Loan State and Local Loan ProgramsPrograms

Capital Access Programs (CAPs) – Capital Access Programs (CAPs) – now offered in 22 states and are now offered in 22 states and are designed to encourage lenders to designed to encourage lenders to make loans to businesses that do make loans to businesses that do not qualify for traditional financing not qualify for traditional financing

Revolving Loan Fund (RLFs) – Revolving Loan Fund (RLFs) – combine private and public funds combine private and public funds to make small business loans to make small business loans


Internal Methods of Internal Methods of FinancingFinancing Factoring - selling accounts Factoring - selling accounts

receivable outrightreceivable outright

Source: "Annual Asset-Based Lending and Factoring Surveys 2006," Commercial Finance Association, July 2, 2007, p. 15.

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Mill

ion

s o

f $

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Factoring Volume(in Millions of $)


Factoring - selling accounts Factoring - selling accounts receivable outrightreceivable outright

Leasing assets rather than Leasing assets rather than buying thembuying them

Credit cardsCredit cards

Internal Methods of Internal Methods of FinancingFinancing


Web SitesWeb Sites

American Bankers AssociationAmerican Bankers Associationhttp://www.aba.com/default.htmhttp://www.aba.com/default.htm

National Association of Small National Association of Small Business Investment CompaniesBusiness Investment Companieshttp://www.nasbic.com/http://www.nasbic.com/

U.S. Small Business U.S. Small Business AdministrationAdministrationhttp://www.sba.gov/http://www.sba.gov/


All rights reserved. No part of this publication may All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, electronic, mechanical, photocopying, recording, or otherwise, without the prior written or otherwise, without the prior written permission of the publisher. Printed in the United permission of the publisher. Printed in the United States of America.States of America.

Copyright ©2009 Pearson Education, Copyright ©2009 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall

Date post:	22-Dec-2015
Category:	Documents
Upload:	britney-woods
View:	221 times
Download:	2 times

Chapter 15 Debt Financing Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1...

Documents