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DIFFERENT FINANCING OPTIONS Mustapha Ojo SCHOOL OF TELCOMMUNICATION 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? 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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 • COMPANY’S ABILITY TO LIQUIDATE ITS CURRENT ASSETS 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION FINANCING METHODS • SHORT TERM FINANCING • LONG TERM FINANCING 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION LEASING • This has become a significant source of intermediateterm 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION 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. 7/17/2015 Mustapha Olalekan Ojo SCHOOL OF TELCOMMUNICATION INTERACTIVE SESSIONS SCHOOL OF TELCOMMUNICATION