12/20/13 WORKING Funding Glossary DRAFT 13:18 MDT
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Bridge Loan. A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Also known as "interim financing, "gap financing" or a "swing loan. As the term implies, these loans "bridge the gap" between times when financing is needed. They are used by both corporations and individuals and can be customized for many different situations. For example, let's say that a company is doing a round of equity financing that is expecting to close in six months. A bridge loan could be used to secure working capital until the round of funding goes through. In the case of an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner more flexibility.
CrowdFunding. The use of small amounts of capital from a large number of individuals to finance a new business venture. CrowdFunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. CrowdFunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists. In the United States, CrowdFunding is restricted by regulations on who is allowed to fund a new business and how much they are allowed to contribute. Similar to the restrictions on hedge fund investing, these regulations are supposed to protect unsophisticated and/or non-wealthy investors from putting too much of their savings at risk. Because so many new businesses fail, their investors face a high risk of losing their principal.
Debt Financing. When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way of raising capital is to issue shares of stock in a public offering. This is called equity financing.
Equity Financing. The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. Also known as "share capital. This is when a company raises money by issuing stock. The other way to raise money is through debt financing, which is when the company borrows money.
Hybrid Instrument. An investment product that combines the attributes of an equity security with a debt security. Generally, hybrid instruments are designed as debt-type instruments with exposure to the equities market. Examples of hybrid instruments are convertible bonds, preferred stocks, equity default swaps and structured notes linked to an equity index. Also called Hybrid Securities. -- InvestorWords
In-House Financing. A type of seller financing in which a firm extends customers a loan, allowing them to purchase its goods or services. In-house financing eliminates the firm's reliance on the financial sector for providing the customer with funds to complete a transaction. The automobile sales industry is a prominent user of in-house financing. Many vehicle sales rely on the buyer taking a loan, in-house financing allows the firm to complete more deals by accepting more customers. Whereas banks or other financial intermediaries might turn down a loan application, car dealerships can choose to lend to customers with poor credit ratings.
Initial Public Offering - IPO. The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a "public offering. IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.
Inventory Financing. A line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period of time than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume - for example, by allowing a business to acquire extra inventory to sell during the holiday season. Lenders may view inventory financing as a type of unsecured loan because if the business can't sell its inventory, the bank may not be able to either. This reality may partially explain why, in the aftermath of the credit crisis of 2008, many businesses found it more difficult to obtain inventory financing.
Investment Bank - IB. A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. The role of the investment bank begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice.
. Basics; Changes; New In process. US SEC
. A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range. Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e.g. expansions, acquisitions, IPO).
Microfinance. A type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. Microfinancing is not a new concept. Small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. Like conventional banking operations, microfinance institutions must charge their lenders interests on loans. While these interest rates are generally lower than those offered by normal banks, some opponents of this concept condemn microfinance operations for making profits off of the poor. The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations.
. Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.
. An exemption for public offerings not
exceeding $5 million in any 12-month period.
Must file an offering statement with the SEC on Form 1-A.
Offerings share many characteristics with registered offerings: offering circular similar to a prospectus; can be offered publicly, using general
solicitation and advertising; purchasers do not receive restricted
securities, so can resell up to $1.5mm of securities. The principal differences from registered
public offerings are:
Regulation D. Establishes exemptions from Securities Act
registration. The only filing
requirement under each of these exemptions is the requirement to file a notice
on Form D with
the SEC. The notice must be filed within
15 days after the first sale of securities in the offering. Many states also require the filing of a Form
D notice in a Regulation D offering. The
main purpose of the Form D filing is to notify federal (and state) authorities
of the amount and nature of the offering being undertaken in reliance upon
Regulation D, Rule 504.
referred to as the seed capital exemption, provides an
exemption for the offer and sale of up to $1,000,000 of securities in a
12-month period. Your company may use
this exemption so long as it is not a blank check company and is not subject to Exchange Act
reporting requirements. In general, you
may not use general solicitation or advertising to market the securities, and
purchasers generally receive restricted securities. Purchasers of restricted securities may not
sell them without SEC registration or using another exemption, which is further
explained below under the heading Resales of restricted securities. Investors should be informed that they may
not be able to sell securities of a non-reporting company for at least a year
without the issuer registering the transaction with the SEC.
Regulation D, Rule 505.
an exemption for offers and sales of securities totaling up to $5 million in
any 12-month period. Under this
exemption, your company may sell to an unlimited number of accredited investors
and up to 35 persons that are not accredited investors. Purchasers must buy for investment purposes
only, and not for the purpose of reselling the securities. The issued securities are restricted securities, meaning purchasers
may not resell them without registration or an applicable exemption, as
explained below under the heading Resales of restricted securities. If your company is not an SEC reporting
company, investors should be informed that they may not be able to sell
securities for at least a year without the company registering the transaction
with the SEC. Your company may not use
general solicitation or advertising to sell the securities.
Regulation D, Rule 506.
a "safe harbor" for the non-public offering exemption in Section
4(a)(2) of the Securities Act, which means it provides specific requirements
that, if followed, establish that your transaction falls within the Section
4(a)(2) exemption. Rule 506 does not
limit the amount of money your company can raise or the number of accredited
investors it can sell securities to, but to qualify for the safe harbor, your
. In process. US SEC
. In process. US SEC
. A guide for small businesses on raising capital and complying with the federal securities laws. Includes Exemptions: Non-Public Offering (Private Placement), Regulation A, Regulation D, Accredited Investor, Intrastate Offering, and Rules 144, 701 & 1001. US SEC
. Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.
"Private equity" is a catch-all term that includes the earliest stages of investing - often when a company consists of little more than its founders and an idea - right through to the large buyout firms that raise equity and debt financing to take public companies private. Within this supply chain, VC firms occupy a position along a continuum such as that represented in the diagram in this article.
Venture capital firms are comprised of private investors who research, negotiate and (hopefully) fund businesses in their early stages of development. Even some of the leaders in business today - Home Depot, Starbucks and Google, to name a few - relied on venture capital in their early stages.
How To Find Venture Funding. The venture capital industry exists to help entrepreneurs turn business ideas into actual, functioning businesses. Most business ventures fail, but there is the occasional home run that can pay for many earlier failures. Other business ventures may not turn the initial founders into billionaires, but can turn into steady businesses that create jobs and incomes for employees and the upper management team. Article is an overview of the stages of venture capital funding, and the most likely parties to secure funding to turn a business concept into reality.
. Registering a company with the Securities and Exchange Commission allows potential investors access to information about stocks and securities being ...