Joseph Fabiilli | Identify the cost of operations

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Identify the cost of operations

• Joseph Fabiilli

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Todays Objectives

• Explore differences among various sources of
  capital.
• Identify the cost of operations.

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Methods of Obtaining Capital

1. Equity Capital
2. Debt Capital

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Owner Capital

• The owner(s) personal contributions to the
  business
• May come from personal savings or personal loans
• Small businesses rely heavily on owner capital
• Also known as equity capital

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Retained Earnings

• Also a type of equity capital because business
  profits belong to the owner(s)
• Business profits saved for use by the business in
  the future

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Debt Capital

• Money that others loan to a business
• Also known as creditor capital
• Banks other lenders usually will NOT lend to a
  business unless the equity capital exceeds the
  debt capital

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Obtaining Equity Capital

• Remember those business structures?

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Sole Proprietorship

• Invest more personal funds
• Sell personal assets to raise
• Mortgage personal property
• Assets used as securities are at risk if the
  business fails.
• Other personal assets at risk
• Change business structure
• Partnership
• Corporation

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Partnership

• Partners usually invest personal resources in the
  business in order to balance/share risk.
• Not mandatory for new partners
• A formal partnership agreement identifies the
  financial contributions of each partner and how
  profits will be shared.

• If the assets of one partner are not enough to
  cover business debts, assets from other partners
  can be taken.
• Owner gives up individual control over management
  and decision-making.

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Corporation

• Can raise capital quickly because the amount of
  money invested is much smaller
• Stockholders are not involved in day-to-day
  management of business.
• Investors are protected financially.

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Obtaining Debt Capital
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Short-Term Debt Capital

• Must be repaid within a year
• Often 30-, 60-, or 90-day loans
• Usually obtained from a bank or other lending
  institutions

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Short-Term Debt Capital

• Business must supply bank with adequate financial
  information.
• Bank usually obtains a financial report on the
  business from a credit company.
• If the bank considers the business to be a good
  credit risk, the bank will grant a loan or a line
  of credit.
• Specific amount, set time period
• Business owner(s) must sign a promissory note.
• Unconditional written promise to pay the lender a
  certain sum of money at a particular time or on
  demand

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Long-Term Debt Capital

• Money borrowed for longer than a year
• Usually obtained through
• Long-term notes
• Bonds

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Term Loans

• Also known as long-term notes medium- or
  long-term financing used for business operations
  or for improving fixed assets
• Written for periods from 1 to 15 years or
  longer
• Significant source of capital for most businesses
• Banks / lenders require the principal and
  interest to be repaid on a regular basis over the
  life of the note.

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Bonds

• Long-term written promise sold by the business to
  investors that promises payment of a definite sum
  of money at a specified time
• Business receives the amount of the bond when it
  is initially sold.
• Must pay bondholder the borrowed amount
  (principal) at the bonds maturity date
• Business pays bondholder interest at a specified
  rate at certain intervals
• Bonds do NOT represent a share of ownership they
  are investments.
• Bondholders are creditors have priority claim
  before stockholders.

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Obtaining Capital

• 3 things to consider

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Cost of Capital

• Costly to sell bonds, long-term notes, or issue
  stock
• Must file forms, obtain approval, make
  agreements, find buyers
• Usually only large or highly successful firms
  even consider stocks/bonds

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Interest Rates

• Rates fluctuate monthly, weekly, even daily
• Best to borrow when rates are low (cheaper)
• When rates are high, businesses usually borrow
  short-term debts.

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Influence of Contributors

• Short-term creditors usually have no control over
  management and operations of business.
• Long-term credit agreements are tied to asset
  claims may impose limitations on those assets.
• Partners / stockholders gain a voice in control
  of business.

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Sources of Capital

• Where do you get the money?

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Sources of Capital

• Banks - most popular source of outside capital
• Small Loan Companies - firms that lend money to
  higher risk business and individuals
• Venture Capitalists
• People or companies that lend large sums of money
  to promising new or growing businesses
• Usually ask for a percentage of ownership rights
  in the company
• Demand a carefully developed business plan that
  shows high potential for success

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Sources of Capital

• Commercial Credit Companies - lend money on
  current assets, such as accounts receivable
• Sales Finance Companies - used primarily when
  installment sales are involved
• Insurance Companies - portions of funds collected
  from policy holders may be loaned to firms
• Individual Investors / Investment Groups
• Pension Funds - retirement funds collected from
  employees may be loaned to firms

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Sources of Capital

• Investment Banking Organizations
• Specialize in selling new security issues to the
  public
• Helps a business raise large sums of capital
  through stocks / bonds
• Can assist a rapidly growing, privately held
  company with IPO
• Equipment Manufacturers
• Firms that do not lend money, but sell needed
  equipment on an extended-time payment plan

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Review!

• 2 Methods of Obtaining Capital
• Types of Debt Capital
• 3 Things to Consider when Obtaining Capital
• 10 Sources of Capital

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So how much money do you need?

• Physical Location

• Cost of Product / Service

• Wages Salaries
• Equipment
• Supplies
• Raw Materials
• Inventory

• Rent / mortgage
• Facility maintenance
• Utilities
• Transportation

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Thank You