Other Sources of Capital

Credit Companies

One of the main sources of capital for entrepreneurs in the United States is in fact the credit card issuers. An examination of the sources of financing available to small and mid-sized companies in the United States reveals that individual and corporate credit cards finance about 50% of U.S. companies which require outside financing. This financing is provided primarily by credit card issuers, which specialize in small businesses. However, these loans are relatively small, short-term, and carry a high interest rate.

Leasing

An allotment of equity in consideration for cash is a rather expensive method of financing a promising venture. Therefore, entrepreneurs do their utmost to finance their startups by other sources.

In recent years, especially due to the fierce competition between automobile and computer manufacturers, leasing arrangements have been readily available from known companies or from companies associated with them. In practice, this is an arrangement which allows the firm to utilize equipment while making periodical payments, rather than buying the equipment upfront. As a result, these leases ease the burden on the startup's cash flow without the dilution involved in raising cash from equity investors. This is one of the only sources of debt available to startups.

Leasing has become an important source of financing for startups. Automobiles, computers, office and other equipment, for instance, are bought by the company with this form of long-term financing. In many cases, the leasing is merely operational, i.e., the equipment remains the property of the leasing company and is returned to it at the end of the leasing term without an option of purchasing at a bargain price the asset at the end of the lease. The leasing conditions have various effects on the ability to deduct its costs for tax purposes when the periodic installments contain components of payment for the equipment and components of the reimbursement of the loan which was used to finance the asset and its current costs.

There are many diverse sources of leasing financing, starting from the manufacturers of the equipment, through companies associated with them, and ending in companies which specialize in leasing financing. The latter buy the equipment for the venture and arrange for a financing package based on the venture's needs and resources.

In many cases, financing packages also include various options for equity investing by the leasing company. Disregarding the equity components of these packages, the cost of capital incorporated in various leasing arrangements is typically high and could range between 15% and 30%. This is a relatively high cost, but it is cheaper than the loss of value which results from a dilution of equity to finance such costs, especially when the value of the venture is not yet high. In addition, since leasing arrangements do not usually involve a personal guarantee, the entire risk is borne by the leasing company and its partners.

Real estate leasing is another method of debt financing, since, in practice, the company signs a long-term contract to use the property in exchange for current periodic payments. In many cases, the cost of leasehold improvements is negotiated, and in various scenarios it is loaded onto the lease and becomes part of the rent.



From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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