Sources of Debt Financing Sources of Debt Financing

Sources
Sources of
of
Debt
Debt Financing
Financing
Chapter 15: Debt Financing Copyright 2003 Prentice Hall Publishing Company 1
Debt Financing
 Must be repaid with interest.
 Is carried as a liability on the
company's balance sheet.
 Can be just as difficult to secure as
equity financing, even though sources
of debt financing are more numerous.
 Can be expensive, especially for small
companies, because of the risk/return
tradeoff.
Consider Borrowing Money to…
 Increase your work force and/or

inventory to boost sales
 Gain market share
 Purchase new equipment
 Refinance existing debt
 Take advantage of cash discounts
Consider Borrowing Money to…
 Buy the building in which your business

is located
 Establish a relationship with a lender
 Retire debt held by a “non-relationship”
creditor
 Deal with a downturn in business
Sources of Debt Capital
 Commercial banks
Financing from Commercial Banks by Company Size
by Number of Employees
84% 86%
90%
80% 73%
Companies Obtaining
Percentage of Small
68%
Commercial Banks
64%
70%
Financing from
59%
60%
50%
40%
30%
20%
10%
0%
0 1-4 5-9 10-19 20-99 100-499
Number of Employees
Commercial Banks
 Lenders of first resort for small

business owners
 80% of all loans to existing
businesses come from banks
 Focus on a company’s ability to
generate positive cash flow when
evaluating loan proposals
Commercial Banks
...the heart of the financial market for small businesses!
 Short-term loans – Commercial

banks’ specialty
 Commercial loans
 Lines of credit
 Floor planning
Commercial Banks
...the heart of the financial market for small businesses!
 Intermediate and long term

loans
 Term loans
 Installment loans
 Discounted installment contracts
 Character loans
 Asset-based lenders
Asset-Based Borrowing
Accounts
 Discounting accounts Receivable
receivable
 Inventory financing
Asset-Based Loans
(in Millions of $)
$350,000
$300,000
$250,000
Millions of $
$200,000
$150,000
$100,000
$50,000
$-
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
 Asset-based lenders $$
 Trade credit
 Equipment suppliers
 Commercial finance companies
 Saving and loan associations
(Continued)
 Stock brokerage houses

 Insurance companies
 Credit unions
 Bonds
 Private placements
 Small Business Investment Companies
(SBICs)
Small Business Investment
Companies (SBICs)
 396 SBICs operate in the U.S.
 Use combination of private capital and
federally guaranteed debt to provide
long-term capital to small companies.
 Since 1960, SBICs have provided more
than $26.5 billion in financing to some
90,000 small companies.
SBIC Financing Patterns
Debt
25.0%
Equity
43.5%
Debt and Equity

31.5%
(Continued)
 Stock brokerage houses

 Insurance companies
 Credit unions
 Bonds
 Private placements
 Small Business Investment Companies
(SBICs)
 Small Business Lending Companies
(SBLCs)
(Continued)
Federally Sponsored Programs:

 Economic Development Administration
(EDA)
 Department of Housing and Urban
Development (HUD)
 U.S. Department of Agriculture’s Rural
Business-Cooperative Service
(Continued)
Federally Sponsored Programs:

 Local Development Companies (LDCs)
 Small Business Innovation Research (SBIR)
 Small Business Technology Transfer
programs
 Small Business Administration (SBA)
Small Business Administration
Loan Programs
 Low Doc Loan Program
 SBAExpress Program
 7(A) Loan Guaranty Program – the most
popular SBA loan program
SBA 7(A) Guaranteed Loans
$12.0
$10.0
$8.0
Billions of $
$6.0
$4.0
$2.0
$0.0
1976 1981 1986 1991 1996 2001
Small Business Administration
Loan Programs
 Low Doc Loan Program
 SBAExpress Program
 7(A) Loan Guaranty Program – the most
popular SBA loan program
 CAPLine Program
 International Trade Programs
 Export Working Capital Program
 International Trade Program
SBA Loan Programs
 Section 504 Certified Development

Company Program
 Microloan Program
 Prequalification Loan Program
 Disaster Loans
 8(A) Loan Program
State and Local Loan Programs
 Capital Access Programs (CAPs) – now

offered in 22 states and are designed to
encourage lenders to make loans to
businesses that do not qualify for
traditional financing.
 Revolving Loan Fund (RLFs) – combine
private and public funds to make small
business loans.
Internal Methods of Financing
 Factoring - selling accounts receivable
outright.
Factoring Volume (in millions)
$90,000
$80,000
$70,000
$60,000
Millions of $
$50,000
$40,000
$30,000
$20,000
$10,000
$-
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Internal Methods of Financing
 Factoring - selling accounts receivable
outright
 Leasing assets rather than buying them
 Credit cards
Web Sites
 American Bankers Association

http://www.aba.com/default.htm
 National Association of Small Business
Investment Companies
http://www.nasbic.com/
 U.S. Small Business Administration
http://www.sba.gov/

Sources of Debt Financing Sources of Debt Financing

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sources of Debt Financing Sources of Debt Financing

Uploaded by

Copyright:

Available Formats

Sources

 Increase your work force and/or

 Buy the building in which your business

 Lenders of first resort for small

 Short-term loans – Commercial

 Intermediate and long term

 Stock brokerage houses

Debt and Equity

 Stock brokerage houses

Federally Sponsored Programs:

Federally Sponsored Programs:

 Section 504 Certified Development

 Capital Access Programs (CAPs) – now

 American Bankers Association

You might also like