DIFFERENT FINANCING OPTIONS

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DIFFERENT FINANCING OPTIONS
Mustapha Ojo
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QUESTIONS TO ASK WHEN LOOKING FOR FINANCING

• WHAT AMOUNT DO I NEED?
• HOW DO I RAISE THE FUND? IS IT THROUGH EQUITY OR
  DEBT?
• WHAT INFORMATION DO I NEED TO PROVIDE THE
  LENDER/INVESTOR
• WHAT ARE THE REPAYMENT TERMS? DO I HAVE TO PAY
  INTEREST? IF SO, WILL IT VARY OVER TIME OR FIXED?
• HOW LONG WILL IT TAKE TO ACQUIRE THE FUNDS?

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QUESTIONS LENDERS WILL ASK BEFORE TAKING DECISION

• INFORMATION TO DERTERMINE HOW THE BUSINESS IS
  MANAGED
• THE SIZE OF THE LOAN AS COMPARED TO HOW MUCH YOU
  HAVE
• COMPANYS ABILITY TO LIQUIDATE ITS CURRENT ASSETS

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FINANCING METHODS

• SHORT TERM FINANCING
• LONG TERM FINANCING

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SHORT TERM LOANS

• Use for seasonal build-ups of inventory and
  receivables, as well as to take advantage of
  supplier discounts or pay lump-sum expenses, such
  as taxes or insurance.
• Repayment is usually in a lump sum with interest
  at maturity
• Short-term loans are generally made on a secured
  (or collateralized) basis and are for a term of a
  year or less.

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CREDIT LINES

• The lender, usually a bank, supplies a business
  with funds intended to fill temporary shortages
  in cash that are brought about by timing
  differences between cash outlays and collections.
• They are typically used to finance inventories,
  accounts receivable or for project or contract
  related work.
• A track record is often needed before approving a
  credit line and collateral may be required.
• Banks will generally require maintenance of
  certain balances of funds in your commercial
  bank account.

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ASSET - BASED FINANCING

• A lender accepts as collateral the assets of a
  company in exchange for a loan.
• The loan is used as a source of funds for working
  capital needs.
• Most asset based loans are financed against
  accounts receivable since they self-liquidate in
  a short period of time by themselves

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FACTORING

• Similar to accounts receivable financing with one
  notable exception.
• Factors actually buy your receivables and rely
  on their own credit and collection expertise.
  Essentially, your customers
• become their customers.
• Payments are made directly to the factor by your
  buyer.
• Factoring is generally used by firms unable to
  obtain bank financing. As a result, the cost of
  factoring is usually higher than other forms of
  short-term financing.

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TERM LOANS

• Use to finance your permanent working capital,
  purchase of new equipment, construction of
  buildings, business expansion, refinance existing
  debt and business acquisitions.
• Term loans are repaid from the long-term earnings
  of the business.
• Therefore, projected profitability and cash flow
  from operations are two key factors lenders
  consider when making term loans.
• Generally, interest rates on long- term loans are
  higher than for short-term loans.

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LEASING

• This has become a significant source of
  intermediate-term financing for small companies
  in recent years.
• Any type of fixed asset may be financed through a
  leasing arrangement.
• Leasing can be accomplished through a leasing
  company, commercial bank, the equipment owner or
  a commercial finance company.
• Leasing offers a great deal of flexibility as it
  can be used to finance even small amounts.
• The leasing company will be particularly
  interested in the cash flow of your company.

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VENTURE CAPITAL

• One problem many new businesses face is raising
  sufficient capital.
• A business in its primary phase will also face a
  difficult challenge getting a bank loan.
• Venture capital firms offer capital in exchange
  for equity in a company.
• This type of financing is ideal for new
  businesses since venture capital firms focus
  mainly on the future prospects of a company when
  banks use past performance as a primary criteria.
  

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LETTER OF CREDIT

• A letter of credit is a guarantee from a bank
  that a specific obligation will be honored by the
  bank if the borrower fails to pay.
• Letters of credit can be useful when dealing with
  new vendors who may not be assured of a company's
  credit worthiness.
• The bank would then offer a letter of credit as
  an assurance to the vendor of payment. Although
  no funds are paid by the bank.

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ANGEL INVESTING

• Angel investor or Business angel is an affluent
  individual who provides capital for a start up
  business usually in exchange for convertible debt
  or ownership equity
• A small but increasing number of angel investors
  are organizing themselves into angel networks or
  angel groups to share research and pool their
  investment capital.

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PRIVATE EQUITY FUNDS

• A fund that invests in companies and/or entire
  business units with the intention of obtaining a
  controlling interest (usually by becoming a
  majority shareholder, sometimes by becoming the
  largest plurality shareholder) so as to be in the
  position of restructuring the target company's
  reserve capital, management, and organizational
  infrastructure.

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INTERACTIVE SESSIONS