The Euro Crisis

The Euro Crisis – What Will and Should Happen

Introduction

There is great concern over what will happen in the Eurozone and the repercussions worldwide. These concerns stem in part from a general fear over what will happen. Below, I try to allay some of these fears by tracing out the most likely outcome. I also say what I would like to see happen.

Setting the Stage

The Eurozone is a monetary union of 17 countries using the Euro (€) their currency. By agreeing to use a single currency, the member countries ceded control over monetary policy to the European Central Bank (ECB). This means one monetary policy for all countries, weak and strong. It also means that when their governments run deficits, they don’t have their own central banks to buy the debt.

The crisis started with a growing sense that the governments of certain members would have difficulty paying their bills. First it was Greece, but concern over Ireland, Portugal, Spain and Italy soon followed (for more on this, see my earlier article). Thing have deteriorated: according to the IMF: “Banks in Greece, Ireland and Portugal have significantly increased their government debt exposure during 2010. Shunned by financial markets and faced with deposit withdrawals, they survive only because the ECB meets in full their demands for liquidity against collateral of rapidly declining quality.”

Greece and Ireland have also agreed to austerity measures imposed by the ECB and the IMF in return for which they get low-interest money. The austerity programs are quite severe, and with unemployment already high in both countries, (Greece 16.6%, Ireland 14.4%), there is real question whether political pressures will force austerity program compromises.

There are economically strong and weak countries in the Eurozone. The strong countries (Germany and The Netherlands) are not happy with what is going on. In particular, they don’t like to see the ECB buying the debt of the weak Euro countries.

But most interesting and troubling, what started as a set of countries “living beyond their means” has now become an international banking crisis: for reasons described in my last article, banks foolishly bought large amounts of the weak Euro countries’ debt. So defaults on the debt could lead to a number of bank insolvencies Sound familiar? Mortgages, sovereign debt, does it really matter what the risky instrument is?

Key Conflicts

Commercial banks in both the strong and weak Eurozone countries stand to lose a lot if Greece or any other Euro nation defaults on its debt. And the ECB is behaving more like a for-profit company than a central bank because it is also fretting about losing asset value if Greece defaults. And Germany is bothered by the large amount of weak company debt being bought by the ECB.

Prediction 1

Most outside observers believe Greece has no option other than to default (see earlier article). I agree. Sooner or later, Greece will default. How much of a default? 25%, 50%, or what? No prediction.

I hope Greece announces that at least for the next 5 years, it will stop making any debt payments, interest or principal. To provide perspective on what this would mean, the IMF estimates that amortization payments on the Greek government debt in 2011 will be approximately €100 billion. The government’s total revenues are about the same.

Prediction 2

Such an announcement will cause an immediate panic. The market for the debt of other Euro “weak sisters” will take a hit.

Many are worried about what impact this will have on banks. Table 1 records bank claims on government. It indicates how much government debt banks of different countries are holding broken down by debtor nation. For example, the table shows that Germany is holding €14 billion of Greek government debt, €117 billion of Irish debt, etc.

Table 1. – Bank Exposure to Government Debt, 2011 (in bil. €)

Source Bank of International Settlements, Quarterly Report, Table 9E

But how big and how serious are these numbers for the banks? In Table 2, I address this question. The first row in that Table is the total external position of banks – read bank exposure) in billions of Euros. The columns below that are bank exposures by country as reflected in Table 1 as a percent of total foreign exposure. Some of the numbers are quite high – France, Germany, and Spain. The bottom reflects the extreme – complete contagion….

Table 2. – Bank Exposure to Government Debt of Selected Countries, 2011

Source: Op. cit. and Table 2A, same source.

It is notable that Italy, UK, and US exposure is very low.

Prediction 3

Given such large exposures, the European banks can be expected to do all they can to keep the Greek default to a very low level.

I pick up on my letter to President Papoulias from an earlier piece: “Let the banks, including the ECB, hang by their heels for a few years.  And if they want to boot Greece out of the Eurozone, fine, let them. You can still use the Euro (or the US dollar if you want) as your currency. The President might ask “we still needFINANCING, who will provide it?” My response: “You just eliminated government debt payments of approximately €100 billion annually. That includes a €16 billion interest payment. Without this burden, your bond rating will shoot up. There will be plenty of private finance available. You are a member of the IMF. Tell them you still need financing and are prepared to work for it under a modified austerity program.”

Pre-Shipment Credit

Pre-Shipment Credit

Introduction
Pre Shipment credit is issued by a financial institution when the seller wants the payment of the goods before shipment. The main objectives behind
pre-shipment credit or pre export finance are to enable exporter to:
Procure raw materials.
Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.

Meet other financial cost of the business.
Types of Pre Shipment credit Packing Credit Advance against cheques/draft etc. representing Advance Payments.

Packing Credit
This facility is provided to an exporter who satisfies the following criteria

A ten digit importer exporter code number allotted by DGFT.
Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:
Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit
the relevant shipping documents to the banks within prescribed time limit.
Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the
buyer.

License issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

Advance against Cheque/Drafts received as advance payment
Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of
realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

LIBOR

LIBOR stands for London Interbank Offered Rate. The world's most widely used benchmark for short term bank borrowing rates.
LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another. LIBOR comes in 7
maturities (from overnight to 12 months) and in 5 different currencies. The official LIBOR interest rates are announced
once per working day at around 11:45 a.m. In the past, the BBA/ICE published LIBOR rates for 5 more currencies
(Swedish krona, Danish krone, Canadian dollar, Australian dollar and New Zealand dollar) and 8 more maturities (2
weeks, 4, 5, 7, 8, 9, 10 and 11 months).
LIBOR is watched closely by both professionals and private individuals because the LIBOR interest rate is used as a base rate (benchmark) by banks and other financial institutions. Rises and falls in the LIBOR interest rates can therefore have consequences for the interest rates on all sorts of banking products such as savings accounts, mortgages and loans.
This site shows you the current and historic rates for all LIBOR interest rates. The interest rates on this site are
updated daily at around 6.00 p.m. (CET) so that you always have access to current, almost real-time LIBOR information. The table below shows a summary of the current rates for all LIBOR interest rates. If you click on the
links you will be able to view extensive current and historic information for the maturity concerned. The tabs allow you
to view the LIBOR interest rates for other currencies. At the bottom of the page you will find links to other pages with LIBOR information.

Performance Management

As a result of this narrow perspective, companies overlook the greater opportunity to leverage the power of performance management as a business management tool that aligns decision making differentially across various roles, reflects the unique aspects of the business model and culture, and considers the risk profile of the industry. By ignoring these facets of performance management, companies are missing out on opportunities to generate economic value. Because they have limited visibility into the value of different employee groups and roles, organizations will often opt to spread HR investments equally across organizational units — for example, investing a comparable amount in critical-skill employees as in employees whose skills contribute less economic value. Companies also face similarly negative consequences when key performance management activities such as goal setting are not aligned with a company’s vision and business model. For instance, a company focused on delivering a superior customer experience may fall short of achieving this objective — and realizing the corresponding economic value — if it uses a rigid top-down approach to goal setting that fails to take into account the unique demands of different customer segments. Lastly, value is also lost when organizations fail to fully consider the implications of their industry’s risk and performance tolerance. For example, a computer chip manufacturer that uses too broad a range of performance goals faces a significant risk that its product will not meet the tightly defined set of quality standards demanded by customers and it will lose significant market share as a result of the variance in its product quality. But not all companies are ignoring the power of performance management as a business management tool. Our work reveals that a number of organizations are making strides in aligning performance management with their companies’ business drivers. These players routinely analyze how variances in business models and risk tolerance can influence the performance requirements placed on different employee segments. This knowledge enables these organizations to better calibrate performance management to get the best return on their HR investments and achieve their strategic priorities. Aligning Decision Making With Business Strategy Unlike many HR processes, performance management has a direct and often-missed connection to a company’s business strategy and key value drivers. While much has been written about cascading goals and the importance of aligning individual key performance indicators (KPIs) with business objectives, research would suggest there is plenty of room for improvement. According to the 2012 Towers Watson Global Workforce Study, 37 percent of the global employee sample gave either a negative or neutral response when asked if they understood their company’s business goals. A similar percentage (38 percent) gave either a negative or neutral response when asked if they understood how their job contributes to their organization achieving its business goals. Moreover, in companies that do attempt to align individual KPIs with broader company objectives, the process of cascading goals is often purely a strategy agnostic, financial exercise. While financial goals may be relevant to executive leaders, they often have minimal relevance to employees at lower levels. Towers Watson research over the years has found that high-performing companies emphasize specific cultural attributes based on their chosen strategy:

• Efficiency. An organization focused on efficiency seeks to attract and retain talent that is productive in a way that optimizes processes, technology and resources. Key characteristics of this type of organization include an emphasis on comprehensive training in basic processes and very precise role descriptions accompanied by disciplined workload allocation. In terms of performance focus, the “what” weighs more heavily than the “how” in an 80/20 ratio. An efficient organization values top down goal setting and quantitative performance metrics.

• Quality. A quality organization looks to focus its workforce on excellence, precision and continuous improvement. Employees in this type of organization are empowered to improve processes and share best practices. A quality-driven company typically relies on multi-rater feedback systems, including peer reviews and top-down metric-driven goal setting. While the what weighs more heavily than the how in performance assessment, it does so to a lesser degree (60 percent what versus 40 percent how) than in an efficient organization. The tolerance for performance variance is typically minimal.

• Innovation. An organization that prioritizes innovation requires its employees to be entrepreneurial, creative and proactive. Its culture encourages diverse thinking and supports risk taking. The emphasis is typically on competency-based goals (the how) that are aligned with the company’s longterm vision. In this type of organization, there is a tolerance for wide performance differentiation and less formal top-down goal setting.

• Customer Service. A service-oriented organization seeks talent it can empower to build strong customer relationships. It promotes teamwork and focuses on long-term development. There is strong support for information sharing, which results in an improved understanding of customer needs and preferences. Because there is significant performance differentiation in this type of organization (as a result of its continuous pursuit of individual excellence), it is important to identify top performers. Goals aligned with customer requirements are typically set on a unit-specific basis to recognize differences in customer requirements.

• Brand. An organization pursuing a brand strategy seeks employees capable of serving as its brand ambassadors. These employees focus on building a community in which there is deep pride in the brand and a strong belief in the product. A brand-focused organization emphasizes team-based goals aligned with its vision and typically relies on a multi-rater feedback system, which includes peer reviews. These cultural attributes have significant implication for all aspects of performance management, including determining the types of goals to use, how targets are set, the degree of variance between targets across a given employee population, etc. Yet it is rare for an organization to start with the cultural attributes required to execute its strategy when it thinks about designing its performance management process. Another area of opportunity to reflect an organization’s strategy — the pathway to delivering financial outcomes — is in employee goals. This integration can be accomplished by cascading the nonfinancial goals of the organization into individual employee objectives in various functions. For example, Exhibit 1 illustrates the case of a printing company that used a value tree to disaggregate high-level metrics into lower-level business drivers that employees can understand. 

ETHICAL ISSUES IN PROMOTION

ETHICAL ISSUES IN PROMOTION

The wide range of promotional techniques that we have discussed in this chapter gives rise to several ethical questions. These are discussed below.

Misleading advertising

This can take the form of exaggerated claims and concealed facts. For example, it would be unethical to claim that a car achieved 50 miles to the gallon when in reality it was only 30 miles. Nevertheless, most countries accept a certain amount of puffery, recognizing that consumers are intelligent and interpret the claims in such a way that they are not deceptive. In the UK, the advertising slogan 'Carlsberg-Probably the Best Lager in the World' is acceptable because of this. Advertising can also deceive by omitting important facts from its message. Such concealed facts may give a misleading impression to the audience. Many industrialized countries have their own codes of practice that protect the consumer from deceptive advertising. For example, in the UK the Advertising Standards Authority (www.asa.org.uk) administers the British Code of Advertising Practice, which insists that advertising should be 'legal, decent, honest and truthful'. Shock advertising such as that pursued by companies like Benetton and FCUK are often the subjects of many complaints to the Advertising Standards Authority.

Advertising to children

 One particularly controversial issue is that of advertising to children. Critics argue that children are especially susceptible to persuasion and that they therefore need special protection from advertising. Others counter by claiming that the children of today are remarkably 'streetwise' and can look after themselves. They are also protected by parents who can, to some extent, counteract advertising influence. Many European countries have regulations that control advertising to children. For example, in Germany, advertising specific types of toy is banned, and in the UK alcohol advertising is controlled. An example of self-regulation at work was the dropping of an advertisement for a soft drink that featured a gang of ginger-haired, middle-aged men taunting a fat youth. The advertisement was withdrawn after numerous complaints were received contending that it encouraged bullying in schools.

The intrusiveness of direct marketing

Direct marketing is criticized for being intrusive and for invading people's privacy. Receiving unsolicited calls from telemarketing companies can be annoying, while many consumers fear that every time they subscribe to a club, society or magazine their names, addresses and other information will be entered on to a database, and that this will guarantee a flood of mail from the supplier. Poorly targeted mail, usually called junk mail, also irritates many people. The direct marketing industry is responding to these concerns and is becoming increasingly sophisticated in how it targets prospects. Many consumers are registering with suppression files indicating that they do not want to be recipients of direct marketing activities.

Use of trade inducements

To encourage their salespeople to push the manufacturers' products, retailers sometimes accept inducements from manufacturers. This often takes the form of bonus payments to salespeople. The result is that there is an incentive for salespeople, when talking to customers, to pay special attention to those product lines that are linked to such bonuses. Customers may, therefore, be subjected to pressure to buy products that do not best meet their needs.

Third-party endorsements

The use of third-party endorsements to publicize a product is another subject for ethical debate. In such cases, a person gives a written, verbal and/or visual recommendation of a product. A well known, well-respected person is usually chosen, but given that payment often accompanies the endorsement the question arises as to its credibility. Supporters of endorsements argue that consumers know that endorsers are usually paid, and are capable of making their own judgments regarding their credibility.

Deception by salespeople

A dilemma that, sooner or later, is likely to face most salespeople is the choice of telling the customer the whole truth and risk losing a sale, or misleading the customer in order to wrap up a sale. Such deception may take the form of exaggeration, lying or withholding important information that significantly reduces the appeal of a product. Such actions can be avoided by influencing the behavior of salespeople through training, by sales management that encourages ethical behavior, which is demonstrated through salespeople's own actions and words, and by establishing codes of conduct for salespeople. Nevertheless, from time to time evidence of malpractice in selling reaches the media. For example, in the UK it was alleged that some financial services salespeople mis-sold pensions by exaggerating the expected returns. This scandal cost the companies involved millions of pounds in compensation.

The hard sale

The use of high-pressure sales tactics to close a sale is another criticism leveled at personal selling. Some car dealerships have been deemed unethical due to their use of hard-sell tactics to pressurize customers into making a fast decision on a complicated purchase that may involve expensive credit facilities. Such tactics encouraged Daewoo to approach the task of selling cars in a fundamentally different way by replacing salespeople with computer stations where consumers could gather product and price information.

Bribery

Bribery is the act of giving payment, gifts or other inducements in order to secure a sale. Bribes are considered unethical because they violate the principle of fairness in commercial negotiations. A major problem is that, in some countries, bribes are an accepted part of business life: bribes are an essential part of competing. When an organization succumbs, it is usually castigated in its home country if the bribe becomes public knowledge. Yet, without the bribe, it may have been operating a major commercial disadvantage. Companies need to decide whether they are going to market those countries where bribes are commonplace. Taking an ethical stance may cause difficulties in the short term but in the long run the positive publicity that can follow may be of greater benefit.

Equity Vs. Debt

Equity financing

Having an investor write you a check may seem like the perfect answer if you want to expand your business but don't want to take on debt. After all, it's money without the hassle of repayment or interest. But the dollars come with huge strings attached: You must share the profits with the venture capitalist or angel investor. 

Advantages to equity financing:

·         It's less risky than a loan because you don't have to pay it back, and it's a good option if you can't afford to take on debt.

·         You tap into the investor's network, which may add more credibility to your business.

·         Investors take a long-term view, and most don't expect a return on their investment immediately.

·         You won't have to channel profits into loan repayment.

·         You'll have more cash on hand for expanding the business.

·         There's no requirement to pay back the investment if the business fails.

Disadvantages to equity financing:

·         It may require returns that could be more than the rate you would pay for a bank loan.

·         The investor will require some ownership of your company and a percentage of the profits. You may not want to give up this kind of control.

·         You will have to consult with investors before making big (or even routine) decisions -- and you may disagree with your investors.

·         In the case of irreconcilable disagreements with investors, you may need to cash in your portion of the business and allow the investors to run the company without you. 

·         It takes time and effort to find the right investor for your company.

Debt financing

The business relationship with a bank that loans you money is very different from a loan from an investor -- and requires no need to give up a part of your company. But if you take on too much debt, it's a move that can stifle growth.

Advantages to debt financing:

·         The bank or lending institution (such as the Small Business Administration) has no say in the way you run your company and does not have any ownership in your business.

·         The business relationship ends once the money is paid back.

·         The interest on the loan is tax deductible.

·         Loans can be short term or long term.

·         Principal and interest are known figures you can plan in a budget (provided that you don't take a variable rate loan).

Disadvantages to debt financing:

·         Money must paid back within a fixed amount of time. 

·         If you rely too much on debt and have cash flow problems, you will have trouble paying the loan back.

·         If you carry too much debt you will be seen as "high risk" by potential investors – which will limit your ability to raise capital by equity financing in the future.

·         Debt financing can leave the business vulnerable during hard times when sales take a dip.

·         Debt can make it difficult for a business to grow because of the high cost of repaying the loan.

·         Assets of the business can be held as collateral to the lender. And the owner of the company is often required to personally guarantee repayment of the loan.

Most businesses opt for a blend of both equity and debt financing to meet their needs when expanding a business. The two forms of financing together can work well to reduce the downsides of each. The right ratio will vary according to your type of business, cash flow, profits and the amount of money you need to expand your business.

Types and Sources of Financing for Start-up Businesses

Types and Sources of Financing for Start-up Businesses

Financing is needed to start a business and ramp it up to profitability. There are several sources to consider when looking for start-up financing. But first you need to consider how much money you need and when you will need it.

The financial needs of a business will vary according to the type and size of the business. For example, processing businesses are usually capital intensive, requiring large amounts of capital. Retail businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain aspects of a business may be an option. Also, incentives may be available to locate in certain communities and/or encourage activities in particular industries.

Equity Financing

Equity financing means exchanging a portion of the ownership of the business for a financial investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company’s profits. Equity involves a permanent investment in a company and is not repaid by the company at a later date.

The investment should be properly defined in a formally created business entity. An equity stake in a company can be in the form of membership units, as in the case of a limited liability company or in the form of common or preferred stock as in a corporation.
Companies may establish different classes of stock to control voting rights among shareholders. Simi­larly, companies may use different types of preferred stock. For example, common stockholders can vote while preferred stockholders generally cannot. But common stockholders are last in line for the company’s assets in case of default or bankruptcy. Preferred stockholders receive a predetermined dividend before common stockholders receive a dividend.

Personal Savings 
The first place to look for money is your own savings or equity. Personal resources can include profit-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.

Life insurance policies - A standard feature of many life insurance policies is the owner’s ability to borrow against the cash value of the policy. This does not include term insurance because it has no cash value. The money can be used for business needs. It takes about two years for a policy to accumulate sufficient cash value for borrowing. You may borrow most of the cash value of the policy. The loan will reduce the face value of the policy and, in the case of death, the loan has to be repaid before the beneficiaries of the policy receive any payment.

Home equity loans - A home equity loan is a loan backed by the value of the equity in your home. If your home is paid for, it can be used to generate funds from the entire value of your home. If your home has an existing mortgage, it can provide funds on the difference between the value of the house and the unpaid mortgage amount. For example, if your house is worth $150,000 with an outstanding mortgage of $60,000, you have $90,000 in equity you can use as collateral for a home equity loan or line of credit. Some home equity loans are set up as a revolving credit line from which you can draw the amount needed at any time. The interest on a home equity loan is tax deductible.

Friends and Relatives 
Founders of a start-up business may look to private financing sources such as parents or friends. It may be in the form of equity financing in which the friend or relative receives an ownership interest in the business. However, these investments should be made with the same formality that would be used with outside investors.

Venture Capital 
Venture capital refers to financing that comes from companies or individuals in the business of investing in young, privately held businesses. They provide capital to young businesses in exchange for an ownership share of the business. Venture capital firms usually don’t want to participate in the initial financing of a business unless the company has management with a proven track record. Generally, they prefer to invest in companies that have received significant equity investments from the founders and are already profitable.

They also prefer businesses that have a competitive advantage or a strong value proposition in the form of a patent, a proven demand for the product, or a very special (and protectable) idea. Venture capital investors often take a hands-on approach to their investments, requiring representation on the board of directors and sometimes the hiring of managers. Venture capital investors can provide valuable guid­ance and business advice. However, they are looking for substantial returns on their investments and their objectives may be at cross purposes with those of the founders. They are often focused on short-term gain.

Venture capital firms are usually focused on creating an investment portfolio of businesses with high-growth potential resulting in high rates of returns. These businesses are often high-risk investments. They may look for annual returns of 25 to 30 percent on their overall investment portfolio.

Because these are usually high-risk business investments, they want investments with expected returns of 50 percent or more. Assuming that some business investments will return 50 percent or more while others will fail, it is hoped that the overall portfolio will return 25 to 30 percent.

More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that typically two investments will yield high returns, six will yield moderate returns (or just return their original investment), and two will fail.

Angel Investors 
Angel investors are individuals and businesses that are interested in helping small businesses survive and grow. So their objective may be more than just focusing on economic returns. Although angel inves­tors often have somewhat of a mission focus, they are still interested in profitability and security for their investment. So they may still make many of the same demands as a venture capitalist.

Angel investors may be interested in the economic development of a specific geographic area in which they are located. Angel investors may focus on earlier stage financing and smaller financing amounts than venture capitalists.

Government Grants 
Federal and state governments often have financial assistance in the form of grants and/or tax credits for start-up or expanding businesses.

Equity Offerings 
In this situation, the business sells stock directly to the public. Depending on the circumstances, equity offerings can raise substantial amounts of funds. The structure of the offering can take many forms and requires careful oversight by the company’s legal representative.

Initial Public Offerings 
Initial Public Offerings (IPOs) are used when companies have profitable operations, management stability, and strong demand for their products or services. This generally doesn’t happen until compa­nies have been in business for several years. To get to this point, they usually will raise funds privately one or more times.

Warrants 
Warrants are a special type of instrument used for long-term financing. They are useful for start-up companies to encourage investment by minimizing downside risk while providing upside potential. For example, warrants can be issued to management in a start-up company as part of the reimbursement package.

A warrant is a security that grants the owner of the warrant the right to buy stock in the issuing com­pany at a pre-determined (exercise) price at a future date (before a specified expiration date). Its value is the relationship of the market price of the stock to the purchase price (warrant price) of the stock. If the market price of the stock rises above the warrant price, the holder can exercise the warrant. This involves purchasing the stock at the warrant price. So, in this situation, the warrant provides the oppor­tunity to purchase the stock at a price below current market price.

If the current market price of the stock is below the warrant price, the warrant is worthless because exercising the warrant would be the same as buying the stock at a price higher than the current market price. So, the warrant is left to expire. Generally warrants contain a specific date at which they expire if not exercised by that date.

Debt Financing

Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. For the creditors (those lending the funds to the business), the reward for providing the debt financing is the interest on the amount lent to the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt does not have collateral and places the lender in a less secure position relative to repayment in case of default.

Debt financing (loans) may be short term or long term in their repayment schedules. Generally, short-term debt is used to finance current activities such as operations while long-term debt is used to finance assets such as buildings and equipment.

Friends and Relatives 
Founders of start-up businesses may look to private sources such as family and friends when starting a business. This may be in the form of debt capital at a low interest rate. However, if you borrow from relatives or friends, it should be done with the same formality as if it were borrowed from a commercial lender. This means creating and executing a formal loan document that includes the amount borrowed, the interest rate, specific repayment terms (based on the projected cash flow of the start-up business), and collateral in case of default.

Banks and Other Commercial Lenders 
Banks and other commercial lenders are popular sources of business financing. Most lenders require a solid business plan, positive track record, and plenty of collateral. These are usually hard to come by for a start- up business. Once the business is underway and profit and loss statements, cash flows budgets, and net worth statements are provided, the company may be able to borrow additional funds.

Commercial Finance Companies 
Commercial finance companies may be considered when the business is unable to secure financing from other commercial sources. These companies may be more willing to rely on the quality of the collateral to repay the loan than the track record or profit projections of your business. If the business does not have substantial personal assets or collateral, a commercial finance company may not be the best place to secure financing. Also, the cost of finance company money is usually higher than other commercial lenders.

Government Programs 
Federal, state, and local governments have programs designed to assist the financing of new ventures and small businesses. The assistance is often in the form of a government guarantee of the repayment of a loan from a conventional lender. The guarantee provides the lender repayment assurance for a loan to a business that may have limited assets available for collateral. The best known sources are the Small Business Administration and the USDA Rural Development programs.

Bonds 
Bonds may be used to raise financing for a specific activity. They are a special type of debt financing because the debt instrument is issued by the company. Bonds are different from other debt financing instruments because the company specifies the inter­est rate and when the company will pay back the principal (maturity date). Also, the company does not have to make any payments on the principal (and may not make any interest payments) until the specified maturity date. The price paid for the bond at the time it is issued is called its face value.

When a company issues a bond it guarantees to pay back the principal (face value) plus interest. From a financing perspective, issuing a bond offers the company the opportunity to access financing without having to pay it back until it has successfully applied the funds. The risk for the investor is that the com­pany will default or go bankrupt before the maturity date. However, because bonds are a debt instrument, they are ahead of equity holders for company assets.

Lease

A lease is a method of obtaining the use of assets for the business without using debt or equity financ­ing. It is a legal agreement between two parties that specifies the terms and conditions for the rental use of a tangible resource such as a building and equipment. Lease payments are often due annually. The agreement is usually between the company and a leasing or financing organization and not directly between the company and the organization providing the assets. When the lease ends, the asset is returned to the owner, the lease is renewed, or the asset is purchased.

A lease may have an advantage because it does not tie up funds from purchasing an asset. It is often compared to purchasing an asset with debt financing where the debt repayment is spread over a period of years. However, lease payments often come at the beginning of the year where debt payments come at the end of the year. So, the business may have more time to generate funds for debt payments, although a down payment is usually required at the beginning of the loan period.