Lines of
Credit are used to fund seasonal changes in inventory
and receivables, take vendor discounts, and meet unexpected
cash needs.
Typically repaid from the business operating cash
flow (i. e. the collection of receivables)
A revolving line of credit lets the business borrow,
repay, and borrow again up to the original amount
committed to by the lender throughout the life of
the loan
A non-revolving line of credit lets the business
borrow an amount either in a lump sum or an amount
disbursed over a period of time. Each time repayment
is made, credit availability reduces by that amount.
Term Loan is a lump-sum disbursement
with payback over a specified period of time. They may
be used to finance equipment, a change in ownership,
a new business acquisition, or other long-term needs
of a company.
It’s important to structure
a term loan so that debt repayment matches business
cash flow. Consideration must
be given to existing debt repayment obligations
as well as potential needs over the term of the loan.
SBA Loans
7(a) Loan – Loans up to $1.5 Million with
no minimum, which can be used to meet the needs of
a company’s beginning or expanding operations
LOWDOC Loan – This is generally the same kind
of loan as the basic 7(a) program but it’s for
expedited loans under $150,000
504 Loan – Long-term loans for land, buildings,
machinery, and equipment with special, negotiated
rates
Collateral
Anything of value (asset) pledged to a lender until a
loan is repaid. Can be seized if the loan is not repaid
Business model The combination of factors that describe the
business, including the market the business will serve,
the perceived value delivered to the customer, which determines
profitability per unit of sale, and the sustaining factors
that allow the company to thrive over the long term
Dilution
A decrease in the equity position of a shareholder when
additional shares are issued
Due diligence Investigation and research carried out in order to evaluate
an investment proposition and determine whether to commit
funds. This process includes reviewing: management team,
market, competition, track record, finances, etc.
Internal rate of return (IRR)
Equivalent to the compound rate of return of an investment
Options/stock options
Financial instrument which gives the holder the right
to buy an underlying instrument (e.g. common stock) at
an agreed amount
Preferred stock This is one of the most common classes for venture
capital firms to hold. Preferred stock pays dividends
at a set rate, and holders get paid before common stock
holders. In the event of a liquidation, convertible
preferred stock is convertible into common stock at a
pre-determined price per share.
Return on investment (ROI) Normally refers to the annual return on capital;
i.e., if your savings account pays 4.1% interest, that
is the ROI. If $100 were invested and earned 50% over
two years, it would be worth $225. Total ROI is the total
percentage increase over the life of the investment.
Warrant
An option to purchase stock in a company, typically exercised
over an extended period
Common stock Capital stock that is secondary to preferred
stock in the distribution of dividends and often of assets
Sub-Debt
Junior or secondary long-term debt that has a lower-priority
claim on a company’s assets in the case of a default
or liquidation
Debt with Equity
The issuance with equity, such as warrants, to an investor-lender
in a debt financing to give the investor the ability to
participate in any upsize potential of the company
