unit 7

• What are 2 advantages of debt?

  you can retain full ownership of the company and it has a predictable repayment
• What are 2 disadvantaged of debt?

  there are risks depending on the ability to repay and it is difficult in early stage businesses
• What are 2 advantages of equity?

  funds without operating profitability and there are no immediate payments
• What are 2 disadvantages of equity?

  you have less decision-making power and it is difficult to raise
• Main issues with debt are maturity, cost, payment schedule and collateral
• maturity is the date on which the life of a transaction ends, after which it must either be renewed or it will cease to exist
• cost of a debt = the amount the firm is borrowing + interest rates
• Collateral is property or other assets that a borrower offers to a lender to secure the loan, if the loan is not payed, the lender keeps the collateral
• Short-term borrowing = loans with a maturity of 1 year or less
• Short-term borrowing is usually used to cover current cash needs
• Long-term borrowing = maturities longer than 1 year
• Long-term loans finance major capital expansions, r&d projects and real estate
• long-term loans are usually used for investments
• Maturity mismatch happens when you finance long-term assets with short-term sources
• What are the 6 types of short-term loans?

  accounts receivable financing, factoring, inventory financing, floor planning and lines of credit
• Accounts Receivable financing: if the client dosnt pay back, it is your responsability (as a company) to get them to do so, if they dont you have to pay the loan
• Factoring is the same as acc. receivable financing but it is less risky and more expensive
• Factoring: if the client doesnt pay back, the bank is in charge of making sure they do (not your responsability anymore)
• Floor planing is a specal form of inventory financing
• Floor planing is very common in a retail sale of very high-priced products (e.g. cars, boats)
• Lines of credit work like a credit card
• Lines of credit are used for special occations when you have liquidity needs
• In accunts receivable financing and factoring, we use accounts reveivable as collateral
• In inventory financing and floor planing, we use inventory as collateral
• What are the 2 types of long-term debt?

  term loans and bonds
• Term loans are loans from a bank to a company that are used to finance expansion efforts
• Term loans have a fixed maturity date of 5-7 years
• The term loans, the company will repay the loan in monthly installments of principal and interest
• Bonds are debt securities issued by an entity (borrower) and bought by a creditor (lender)
• Bonds are negotiable securities, meaning they can be bought and sold
• Face value of a bond = the amount paid to the holder at maturity
• Price of the bond = the selling and trading price of the bond
• What are the 5 types of bonds?

  zero-coupon bond, debentures, mortgage bonds, convertible bonds and senior debt
• Sources of equity capital: angel investors, venture capital firms, corporate investors and capital markets (IPO)
• Angel investors are individual investors who buy equity in small, private firms.
• For many start-ups, the first round of outside private equity comes from angel investors
• Venture capital firms can provide a substancial equity for young companies
• Venture capital firms typically control about 1/3 of the seats on a start-up's board directors
• Common stock is a share of ownership in the corporation which gives you rights to any dividends and the rights to vote on the election of directors
• Dilution happens when a company issued more shares, reducing the existing investor's proportional ownership of that company