FINANCING THE ENTERPRISE



FINANCING THE ENTERPRISE

Financing has blossomed into a huge smorgasbord of simple, complex, and even exotic techniques for raising capital. Our focus here will be on the basic sources of financing that represent the large majority of business funding. We will cover the following topics.

▪ Principal differences between debt and equity, the two fundamental building blocks of all financing

▪ Alternative sources of financing

▪ How the financing is obtained

▪ How firms decide which financing methods best meet their needs

TYPES OF FINANCING

Principal differences between debt and equity, the basic elements of virtually all financing

▪ Priority of Claim: Debt has priority over equity. In bankruptcy, creditors receive what is owed before shareholders receive anything.

▪ Cash Payments: Debt is promised principle and interest. Equity is promised nothing (dividends need not be paid)

▪ Control: Shareholders elect the board of directors, and vote on major firm decisions (e.g., a merger or a sale of major assets). Lenders do not vote but may impose constraints on the firm, e.g., on dividends, capital investments, and various measures of performance.

▪ Taxes: Interest expense is tax-deductible; interest income is taxable for lenders. Firm income (net of interest expense) is taxed differently for C-corporations than for other types of firms.

o C-Corporation: Virtually all publicly traded firms are C-Corporations, which are subject to two taxes on their income: Corporate income tax (34% tax rate for large firms); and a personal income tax on dividends and on capital gains (gains from selling shares) received by stockholders.

o S-Corporations, Limited Liability Companies, Partnerships, and Sole Proprietorships: Firm income (whether or not distributed) is subject only to the personal income tax paid by the owners.

The Taxation of a C-Corporation

EXHIBIT 1. Income Tax of a C-Corporation

|Sales |$600,000,000 |

|Cost of goods sold | 360,000,000 |

|Gross profit |$240,000,000 |

|General and administrative expenses | 40,000,000 |

|Earnings before interest & taxes | $200,000,000 |

|Interest expense | 100,000,000 |

|Earnings before tax | $100,000,000 |

|Tax @ 34% | 34,000,000 |

|Net income | $ 66,000,000 |

C-Corporation and Double Taxation

If the $66,000 is paid as a dividend, the stockholder pays an added tax up to 15%. If the tax is 15%:

Exhibit 2. Tax on Dividend Income of Stockholders

|Dividend received |$66,000,000 |

|Tax on dividend (at 15%) | 9,900,000 |

|After-tax dividend |$56,100,000 |

SOURCES OF DEBT FINANCING

Trade Credit

Extra time to pay (after the invoice date) given by a supplier to its customer. For example, suppose that purchases from a supplier are made under the terms 2/10, net 30. This means that a 2 percent discount is given if payment is within 10 days of the invoice date, and the amount due must be paid within 30 days of the invoice date.

▪ An extremely convenient, and popular, method of short-term financing.

▪ Negligible transaction costs is using trade credit; but interest cost may be high or low.

▪ One should compute the implied interest rate on trade credit

▪ May be able to “stretch” payables, but must make sure that this does not involve an unacceptable penalty.

The Cost of Trade Credit: Trade credit is not free. Let’s compute its cost. Suppose that you buy a $100 per unit (price if no discount) input on the following terms.

Terms: 2/10, net 30, i.e, pay $98 up to day 10, and $100 after that up to day 30.

Firm should pay either on day 10 or on day 30. Paying $98 before day 10, or $100 before day 30, ignores the time value of money (the interest that you could earn on your funds).

If you pay on day 30 rather than day 10, you have $98 for a 20 extra days, and you pay $2 more (like borrowing $98 for 20 days with $2 in interest). So:

Interest rate for 20 days = [pic]= 2.04%

Annualized rate (365 day year) = [pic]( 2.04%

= 37.23%

Borrowing from the vendor (waiting until day 30 to pay) is like borrowing at an annual rate of 37.23 percent. Rather high, don’t you think?

BankS AND FINANCE COMPANIES

Commercial banks take deposits, loan money, and serve both consumers and businesses. Familiar names include Bank of America, Wells Fargo, KeyBank and Citibank. Commercial banks have relatively stringent lending standards. Loans are both secured and unsecured.

Commercial finance companies are non-depository institutions that provide capital to business firms, particularly higher risk firms that may not qualify for bank credit. These finance companies focus on asset-based financing (lending backed by the borrower’s assets), but they also provide unsecured loans. Leading commercial finance companies include CIT Finance, GE Commercial Finance, GMAC Commercial Finance, PNC Business Credit, Wells Fargo Business Credit, Bank of America Business Capital, and CitiCapital.

Below are some recent announcements of financing transactions. We will later define the terms that are used.

(Dallas, Texas; March, 2004) - Dresser, Inc. secures a new six-year $125 million senior unsecured term loan, and a new $235 million term loan under its existing Senior Secured Credit Facilities.

(Basking Ridge, New Jersey; February, 2005) – Avaya Inc., a leading provider of business communications software, systems and services, arranges a $400 million five-year unsecured revolving credit facility. The facility replaces an existing $250 million secured credit.

(Denver Colorado, January 2005) – Sierra Hills arranges a $6,950,000 of interim financing for its 119-unit independent, senior living apartment complex in Porterville, California. The facility, constructed in 1999, consists of four buildings totaling 103,441 square feet.

(Garland, Texas, January, 2005) Arena Brands, a western wear manufacturer, establishes with GE Commercial Finance a $30 million senior secured credit facility to replace existing debt.

Seasonal Line of Credit – Short-term Borrowing to Meet Temporary Needs

▪ Borrowing for less than a year to finance seasonal needs

▪ Use to finance seasonal increases in inventory or accounts receivable

▪ Can be cancelled by bank at any time (but this option is very carefully, and infrequently, used)

▪ Expected to be “out of the bank” a couple of months during the year

▪ Traditionally unsecured, although security requirement is increasingly common

▪ Interest rate can be floating or fixed

Term Loan – Fixed term business loan for more than one year

▪ Usually one to five years, but may be as long as 25 years (mortgage loan).

▪ Usually secured. May be unsecured if borrower has a high credit rating. The security is generally property, plant and equipment.

▪ Usually floating interest rate based on prime, federal funds rate or LIBOR; may be an ARM. May be a fixed rate; or can arrange an interest rate swap of floating into fixed.

Revolving Credit – Agreement to lend, for a stated time period, up to a given amount.

▪ Usually one to three years, with a majority of lines one year. Can be up to seven years.

▪ Security is accounts receivable or inventory, and is sometimes property, plant and equipment. Receivables must meet credit standards; a percent of value is loaned (better accounts mean a higher percent). Inventory collateral must have stable market value; manufactured finished goods, consumer durables, or raw materials with stable markets (e.g., wheat) are good collateral.

▪ Usually floating rate or an ARM; can swap into fixed.

▪ Lender may charge a fee for any unused portion of the line (for example, for a $3 million line with $1 million currently borrowed and $2 million unused, interest is charged on $1 million, and .5 percent per year fee on the unused $2 million).

▪ Relatively high interest rate.

▪ Floor planning is credit line often used in financing automobile dealers, farm and industrial equipment, and sellers of consumer durables.

Interim (Bridge) Financing – Short-term loan for an interim period until long-term financing is obtained.

▪ Generally collateralized (with real property, equipment, inventory, etc.)

▪ Often used to finance construction (or to provide temporary refinancing) of industrial plants, apartment houses, shopping centers, etc.

Mortgage Loan – Collateral is real property

▪ Secured by real property

▪ Can be up to 25 years

▪ Usually a variable rate (floating or ARM)

▪ Often an origination fee, e.g., .5% of the loan

▪ Will need three years of financial statements and personal (and/or corporate tax returns). The lender runs its own cash flow projections, although borrower may submit them. Lender runs analysis of return on equity, etc. If leased property, will want a security interest in leases.

Factoring

Factoring is the sale of accounts receivable to a “factor,” which is a firm engaged in the business of buying such accounts. The factor evaluates the accounts and chooses those it is willing to purchase; the purchase price depends on the quality of the accounts receivable.

Factor does a credit analysis of the accounts, chooses those it will buy, and pays a price for the accounts in accordance with the credit analysis.

▪ Non-recourse (factor the assumes risk of non-payment)

▪ Usually non-notifcation basis; customers are unaware of sale of receivables.

▪ Factor may provide additional unsecured financing, credit analysis of customers, and collections of amounts due.

▪ Relatively expensive

SMALL BUSINESS ADMINISTRATION (SBA) LOANS

▪ Loans are provided by banks, commercial finance companies, and other institutional commercial lenders

▪ Loans are up to 80 percent guaranteed by the SBA

▪ Business must be a “small business” by SBA standards (size varies by industry)

▪ Loans can be for a longer term than is typical for commercial loans

▪ Loans are available to borrowers who might not be able to obtain financing elsewhere

See Appendix A for details on SBA programs.

PUBLIC FINANCING

Public financing is the public issuance of securities. The securities may be debt (bonds, commercial paper, notes, etc.), stock (typically common stock or preferred stock), or any of a number of derivative securities (such as convertibles, warrants, and put options). Public sale of a security requires approval by the Securities and Exchange Commission.

Commercial Paper – Very short-term debt

▪ Maturity is 2 days to 270 days (majority is 30 days or less)

▪ Issued by only prime rated commercial firms and financial companies (e.g., banks)

▪ Unsecured; usually backed by a bank line of credit

▪ Low interest cost (most issued on a discount basis; some make interest payments)

▪ Can be publicly offered or privately placed

Notes and Bonds

▪ Notes usually refer to debt instruments with a maturity of up to 10 years, and bonds to debt instruments with a maturity of more than 10 years

▪ May be secured or unsecured (debentures)

▪ Contain restrictive covenants

▪ May pay a regular coupon (interest) every six-months; or one balloon payment when mature (zero-coupon)

▪ Interest rate is usually fixed, but may be floating (tied to LIBOR, prime, etc.)

▪ Issued through investment banker, who either guarantees the price, issues on a best-efforts basis, or conducts an auction

▪ Can be publicly offered or privately placed

▪ Publicly traded debt has lower interest cost than privately placed debt with the same credit rating

▪ Bonds, and General Credit, are Rated by Standard & Poor’s, Moody’s and Fitch. Here are some examples.

General Electric: AAA

Wal-Mart: AA

Target: A+

Coke: A

Best BUY: BBB

Gap Inc.: BBB-

Ford: BB+

General Motors: BB

Continental Airlines: B-

Paxon Communications: CCC+

Delta Airlines: CC

TABLE 1. BOND RATINGS

|Moody's |S&P |Fitch | |Definitions |

|Aaa |AAA |AAA | |Prime. Maximum Safety |

|Aa1 |AA+ |AA+ | |High Grade High Quality |

|Aa2 |AA |AA | |  |

|Aa3 |AA- |AA- | |  |

|A1 |A+ |A+ | |Upper Medium Grade |

|A2 |A |A | |  |  |

|A3 |A- |A- | |  |  |

|Baa1 |BBB+ |BBB+ | |Lower Medium Grade |

|Baa2 |BBB |BBB | |  |  |

|Baa3 |BBB- |BBB- | |  |  |

|Ba1 |BB+ |BB+ | |Non Investment Grade |

|Ba2 |BB |BB | |Speculative |

|Ba3 |BB- |BB- | |  |  |

|B1 |B+ |B+ | |Highly Speculative |

|B2 |B |B | |  |  |

|B3 |B- |B- | |  |  |

|Caa1 |CCC+ |CCC | |Substantial Risk |

|Caa2 |CCC |- | |In Poor Standing |

|Caa3 |CCC- |- | |  |  |

|Ca |CC |- | |Extremely Speculative |

|C |- |- | |May be in Default |

|- |- |DDD | |Default |

|- |- |DD | |  |  |

|- |D |D | |  |  |

|- |- |- | |  |  |

LENDERS’ EVALUATION OF A PROSPECTIVE BORROWER

Virtually all lenders directly, or indirectly, examine most or all of the following company characteristics to evaluate a prospective borrower (often dubbed “the five Cs”).

Character: The talent and integrity of the firm’s management.

Capital: Debt relative to equity financing. A lower debt-to-equity ratio usually means a lower likelihood of financial distress.

Cash Flow: Relationship between a company’s cash flows and the cash requirements for servicing financial obligations.

Conditions: Macroeconomic conditions faced by the firm.

Collateral: Liquidation value of the collateral relative to the loan, and the specific claim that the lender has on the assets (priority of the lender). This critical for asset based loans.

The firm’s financial ratios reflect some of the information used to evaluate the firm. Some of the ratios that are used:

Current ratio: [pic]

Quick ratio: [pic]

Debt ratio: [pic]

Times interest earned: [pic]

Fixed charges coverage: [pic]

Inventory turnover: [pic]

Collection period: [pic]

Return on equity: [pic]

SOURCES OF EQUITY FINANCING

PRIVATE SOURCES OF EQUITY CAPITAL

Private Placement

▪ Financing for established firms that is secured through direct negotiation with equity investors (not through a public offering); investment banker may be involved.

▪ Does not require SEC approval (unlike a public offering)

▪ May be from an institutional investor or from an individual

▪ If from an individual, must meet requirements of the Regulation D (U.S. Securities Act of 1933, as amended) – Restrictions on who may participate, manner of offering, resale of securities, etc. Fewer restrictions on smaller offerings ($5 million or less)

▪ Lower issuance costs than a public offering

▪ Slightly higher rate of return must be offered to the buyer since privately placed securities are less liquid (i.e., are not publicly traded).

Angel Investor

▪ Wealthy individual who supplies equity or debt capital to start-ups and small firms

▪ Usually equity, or securities convertible to equity, given in return for financing

▪ Estimated 250,000 angel investors in the U.S.

▪ Most angels provide $50,000 to $500,000 of financing

Venture Capital

▪ Financing for start-ups, turn-arounds or other high-risk ventures provided directly through a private placement.

▪ Offered by venture capital firms, corporations, institutions, and wealthy individuals (see Appendix B for a list of venture capital firms and for corporations with venture capital units)

▪ Provides equity capital (common stock or convertible preferred)

▪ Participates in company governance (e.g., position on board of directors)

▪ Provide advice and other assistance (e.g., contacts with other firms)

▪ Funds may be offered in stages

▪ Some only participate in first round, second round, or mezzanine level (pre-IPO) financing

Note that the venture capital is invested on an “after the money” basis (this is also true for an offering of securities by the firm, whether public or private).

Example: Venture capital firm Star Capital plans to invest $10 million in Hi Wire Technologies, Inc. It currently has 12 million shares outstanding. The intrinsic value (fair market value) of Hi Wire’s assets and liabilities (before the venture capital investment) are as shown below.

Market Value Balance Sheet of Hi Wire Technologies Before Venture Investment

|ASSETS: | |

| Cash |$1,000,000 |

| Intellectual property |$4,000,000 |

| Property, plant and equipment |$3,000,000 |

| Goodwill (excess above liquidation | |

|value of other assets) |$8,000,000 |

| Total Assets |$16,000,000 |

|LIABILITIES: | |

| Accounts payable |$200,000 |

| Wages and salaries payable |$100,000 |

| Short-term bank loan |$700,000 |

| Total Liabilities |$1,000,000 |

|EQUITY (ASSETS ( LIABILITIES) |$15,000,000 |

Market Value Balance Sheet of Hi Wire Technologies After Venture Investment

|ASSETS: | |

| Cash |$11,000,000 |

| Intellectual property |$4,000,000 |

| Property, plant and equipment |$3,000,000 |

| Goodwill (excess above liquidation | |

|value of other assets) |$11,000,000 |

| Total Assets |$29,000,000 |

|LIABILITIES: | |

| Accounts payable |$200,000 |

| Wages and salaries payable |$100,000 |

| Short-term bank loan |$700,000 |

| Total Liabilities |$1,000,000 |

|EQUITY (ASSETS ( LIABILITIES) |$28,000,000 |

Veture Capitalists have invested $10 million and the firm’s equity fair market value is $28 million. The increase in value is due to two things:

• $10 million additional cash

• $3 million increase in value due to rise in probability of Hi Wire’s success due to the injection of $10 million in cash, and the intangible benefits of the venture capitalist’s participation (management skills, contacts and network, etc.).

Star Capital will want to receive shares worth more than $10 million (more than it invested). Hi Wire must be ahead as a result of the $10 million capital venture funding (i.e., Hi Wire must have a remaining interest worth more than its original $15 million).

How many shares paid to Star Capital will satisfy both Star Capital and Hi Wire?

PUBLIC SOURCES OF EQUITY CAPITAL

Exchanges

▪ New York Stock Exchange (“Wall Street”) and the American Stock Exchange are major exchanges (both located in New York City)

▪ New York Stock Exchange lists the stocks of the largest and strongest firms – minimum capitalization and earnings requirements

▪ American Stock Exchange - second largest U.S. exchange; largest market for foreign securities. Options and derivatives are traded here.

NASDAQ

▪ Shares traded electronically by dealers; is located on a telecommunications network rather than a physical trading floor

▪ Is merged with the American Stock Exchange

▪ “Over-the-counter” stocks – smaller companies, although some giants are listed on the NASDAQ (such as Microsoft and Intel)

BECOMING A PUBLIC COMPANY

Reasons for Going Public

▪ Increases company’s market visibility

▪ Makes the stock far more liquid - shareholders (including employees who have exercised their stock options) can trade the stock more easily because a ready market exists [This liquidity, on average, raises the market value of equity by about 25 percent.]

▪ Shares may be worth more because the company is regulated by the SEC and is covered by Sarbannes-Oxley

▪ To raise funds through sale of stock in the IPO

▪ To make it easier to raise capital in the future

Reasons for Not Going Public

▪ Greater regulation and disclosure requirements (SEC and Sarbannes-Oxley) and the associated costs

▪ The time and expense of the initial public offering (investment banking fees, legal fees, etc.)

Steps in “Going Public”:

▪ Firm selects an investment banker (Morgan Stanley, Goldman Sachs, CSFirstBoston, etc.)

▪ Firm files the IPO registration with SEC

▪ SEC reviews and approves the registration

▪ Company must make sure complies with the “blue sky” laws (laws on security sales) of each state

▪ Investment bankers and firm go on a “road show” to promote the offering to analysts, fund managers, and potential investors.

▪ Investment banker obtains tentative commitments by investors to buy the stock

▪ IPO. On the day of the initial public offering, the price and number of shares is set

Primary Issue – Security sale by the issuing firm.

Seasoned Issue – Issue of securities by a firm that has already issued that type of security, e.g., shares issued by a public company.

Secondary Market (After Market) – Market for publicly traded securities after they have been initially issued (sold).

Summary - Sources of Financing

Exhibit 3a. Debt Financing

| | | Security |Interest; fixed or floating |

| |Term |Required? | |

|Trade Credit |Less than 1 year |No |Fixed |

|Seasonal Credit Line |Less than 1 year |Usually |Usually floating |

|Term Loan |One to 15 years |Usually |Usually floating |

|Revolving Credit Line |Usually, 1 to 3 years, potentially longer |Usually |Usually floating |

|Bridge Loan |Up to 2 years |Usually |Varies |

|Mortgage Loan |Up to 25 years |Always |Usually floating |

|Factoring |Immediate |No |Fixed |

|SBA |Up to 25 years |Varies |Varies |

|Public Debt |Up to 50 years or more |Secured and unsecured |Usually fixed; may be floating |

Exhibit 3b. Equity Financing

| |Purpose |Where funds obtained |Type of security offered |

|Private Placement |Investment or other |Private investors |All types of equity |

| | |Private equity funds | |

| | |Institutions | |

|Angel Financing |Startup or young firm |Wealthy individuals |Common stock or convertible security |

|Venture Capital |Startup or turnaround |Venture capital firms; corporations |Common stock or convertible security |

|Public Offering |Investment or other |Any party allowed to invest in equities |All types of equity |

THE DATA –

Below are data on the average proportions of financing from various sources for U.S. corporations.

Table 2a. Sources of Corporate Financing

|Source of Financing | |

|Internal Funds |90% |

|Net equity issues* |-2% |

|Debt instruments |12% |

*New shares sold minus shares repurchased.

Table 2b. Debt Instruments Used by Corporations

|Source of Financing | |

|Short-term debt |38% |

|Long-term loans – banks |14% |

|Long-term loans – non-bank financial institutions |23% |

|Bonds |25% |

THE DEBT-EQUITY FINANCING DECISION

Below is table that shows the results of three surveys of financial managers regarding the factors that are important in setting the firm’s debt-to-equity ratio. Each of the six factors is explained.

Table 3. Determinants of Long-term Capital Structure As Reported by Financial Executivesa

|Determinant |Scanlon |Stonehill |Conference Board |

| | |et al. | |

|Business & Default Risk |Y |Y |Y |

|Interest tax effect b |Y |Y |Y |

|Timing |Y |Y |Y |

|Clientele Effect |N |Y |Y |

|Bond Rating |Y |N.Ac |Y |

|Flexibility |Y |N |Y |

a Y = Yes, this factor is important; N = No, this factor is not

important. Only publicly traded firm (all of which were C-

corporations) were surveyed.

b Tax-deductibility of interest

c Possibility not included in questionnaire format.

Business Risk: For any given debt-to-equity ratio, a higher underlying business risk (i.e., higher uncertainty of cash flows and firm value) implies a greater risk of default. Typically, firms in riskier lines of business maintain lower debt-to-equity ratios.

Tax Deductibility of Interest: The corporate tax benefit from debt interest is greater the higher is the firm’s tax rate. For example, if interest paid is $100 million, the tax resulting tax savings is $34 million if the firm’s tax rate is 34 percent, is $10 million if the tax rate is 10 percent, and is zero if the firm has no taxable income. Generally, only firms with a high corporate tax rate should have significant long-term debt relative equity.

Clientele Effect: Stockholders and lenders assume that the debt policy (debt/equity) will not change radically. To keep these clienteles happy, firms try to maintain stable policies.

Timing: Management usually has a general view as to whether the firm’s stock is markedly undervalued (i.e., is well below intrinsic value (fair value)), markedly overvalued, or, roughly, reasonably valued. If management believes the stock is undervalued (stock price is less than intrinsic value) and interest rates are low, debt financing will be preferred. Stock overvaluation and high interest rate encourage management to use equity financing.

Bond Rating: Typically, a company wants its bond rating to remain at or above some particular achievable threshold, such as investment grade (S&P BBB). Falling below this threshold conveys negative information to the market, and means higher interest rates on the firm’s new borrowing.

Flexibility: It is desirable to maintain borrowing capacity to meet unexpected needs, either to exploit a new opportunity or to deal with an unanticipated problem.

OBSERVED CAPITAL STRUCTURES

Table 4 shows the average capital structures of U.S. corporations.

Table 4. Capital Structure of U.S. Business Firms*

| |Debt to |Representative |

|Industry |Equity* |Companies |

|Dairy Products |.15 |Ben and Jerry’s, Dreyer’s |

|Fabric apparel |.30 |VF Corp., Jones Apparel |

|Paper |.59 |Kimberly-Clark, For James |

|Pharmaceuticals |.03 |Pfizer, Warner-Lambert |

|Petroleum Refining |.44 |ExxonMobil, USX-Marathon |

|Rubber footwear |.41 |Nike, Reebok |

|Steel | 1.26 |Nucor, USX-US Steel |

|Computers |.07 |Cisco, Dell |

|Motor Vehicles |.71 |Ford, General Motors |

|Aircraft |.20 |Boeing |

|Airlines |.90 |Delta, Southwest |

|Cable television |.69 |Cablevision, Cox Comm. |

|Electric utilities |.99 |Southern Co. |

|Department stores | 1.10 |Sears, Kohl’s |

|Eating places |.39 |McDonald’s, Wendy’s |

*Debt is the book value of debt. Equity is the market value of

outstanding shares.

*Ibbotson Associates

Comments on the observed capital structures.

▪ Debt-to-equity ratios differ widely among industries.

▪ The average debt-to-equity ratio of U.S. firms is a little less than the average debt-to-equity ratio of other major industrialized countries.

▪ Firms within an industry vary widely with respect to debt-to-equity ratio (not indicated by the above table). This is because firms vary in profitability (ability to use the corporate interest tax deduction), stability of cash flow, assets, and other characteristics.

APPENDIX A: Small Business Administration Loans

Here are the main SBA loan programs for small businesses.

Basic 7(a) Loan Guaranty – This is the SBA’s primary business loan program. Available to assist qualified small businesses or start-ups that may not otherwise be able to secure financing. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.  Loan proceeds for such uses as working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.  The loans are made by commercial lending institutions, generally banks. WEBSITE: financing/sbaloan/7a.htm 

Certified Development Company (CDC) 504 Loan Program – SBA guarantees long-term, fixed-rate financing to small businesses to acquire real estate, machinery or equipment. Typically, a loan obtained from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower.  The loans are made by Certified Development Companies, which are private, nonprofit corporations set up to contribute to the economic development of their communities or regions.

WEBSITE: financing/sbaloan/cdc504.htm 

Micro-loan 7(m) Loan Program – Short-term loans up to $35,000 to small businesses and not-for-profit child-care centers for working capital, inventory, supplies, furniture, fixtures, machinery and/or equipment. May not used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, which makes the micro-loan to the applicant. The loans are not guaranteed by the SBA. The micro-loan program is available in selected locations in most states.  Borrower must give personal guarantee of the loan. These loans are provided by designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance).

WEBSITE: financing/sbaloan/microloans.htm 

Loan Prequalification – Business applicants have their loan applications for $250,000 or less reviewed and potentially sanctioned by the SBA before applications are submitted to lenders (standard financial intermediaries). The SBA evaluates the applicant’s character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBA’s Office of Field Operations and SBA district offices. 

WEBSITE:financing/sbaloan/prequalification.htm

APPENDIX B. Providers of Venture Capital

VENTURE CAPITAL FIRMS

Accel Partners

Alliance Technology Ventures

Austin Ventures

AVI Capital

Bachow & Associates

Batterson

Battery Ventures

Bessemer Venture Partners

Capital Access Partners

Crosspoint Venture Partners

Draper Fisher Jurvetson

Edison Venture

EOS Partners LP

Fleet Equity Partners

Hummer Winblad

J.L. Albright Venture Partners

JP Morgan

Kleiner Perkins Caufield & Byers

Norwest

Oak Investment Partners

Pacific Century Group Ventures

Polaris Venture Partners

Shawmut Capital Partners

Sierra Ventures

St. Paul Venture Capital

Summit Partners

Technology Funding

Triden

U.S. Venture Partners

CORPORATE VENTURE CAPITAL

Chevron Corporation

Coca-Cola Corporation

Comcast Corporation

Electronic Data System Corporation

Fujisawa Pharmaceutical Corporation

Intel Corporation

Microsoft

Oracle Corporation

Reader’s Digest Association

Texas Instruments

Toys R Us

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