Exam 13: Sources of Financing: Debt and Equity

Mini-Case 13-1: "Where do I go now ...? Christine Hernandez is in the process of launching a restaurant. Christine has never owned her own restaurant before, but she has worked for two of the best restaurants in town. Starting out as a hostess, Christine developed a special knack for the business and quickly worked her way up to the job of manager. Her 18 years of experience have given her a solid foundation for running her own restaurant. Christine has worked with a counselor at a nearby Small Business Development Center and a counselor from the Service Corps of Retired Executives to prepare a business plan. She asked two other consultants and an accountant to review the plan and incorporated their suggestions into the finished product. When Christine took her plan to her bank however, the bank turned down her loan request of $165,000 citing the venture as "too risky, given the failure rate of restaurants." The bank acknowledged her experience as "a major asset," but said that it "could not expose itself to such risks in its portfolio." Christine heard the same story from three other banks. Christine is confident in her ability to manage her own restaurant successfully, and she is determined to get the financing she needs to launch it. -What might Christine do to convince a bank to lend her the money she needs to launch her company?

Angels fill an important role in equity financing of a small business. Discuss their role, their typical profile, and how to find an angel.

The recent turbulence in the financial markets has caused banks to ________ their lending standards, making it ________ for small businesses to qualify for loans.

Venture capital companies invest only in companies in the startup phase.

A company that is experiencing rapid expansion has similar capital requirements as those of a fledgling business.

In most SBA loans, the SBA does not actually lend any money, it merely guarantees a bank repayment of a portion of the loan the bank makes in case the borrower defaults.

What other sources of capital would you suggest that Christine explore?

Venture capital companies are an important source of equity funding for small businesses. Discuss their policies, ownership control, and investment preferences regarding funding small businesses.

In an initial public offering, a company raises capital by selling shares of its stock to the general public for the first time.

Venture capital firms rarely take an active role in managing the business in which they invest.

Only about half of the companies that attempt a public stock offering ever complete the process.

The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called ________.

Rather than piecing together their startup capital from multiple sources as they have in the past, entrepreneurs now are relying on a single source of funding.

Rule ________ of the Regulation D exemptions is the most popular.

A bank loan that imposes restrictions or covenants on the business decisions an entrepreneur makes concerning the company's operations is called a ________.

The single most important ingredient in making a successful public offering is ________.

A term loan ________.

A public stock sale is an effective method of raising large amounts of capital, but it can be an expensive and time-consuming process filled with regulatory nightmares.

Angels fill a significant gap in the seed capital market.

Commercial banks provide ________ of loans to small business.