Welcome to the next snippet of the quick course wherever the money is, in this snippet will focus on the additional sources of capital for your startup. One of those might be the best for your startup in the condition it's in right now. We have quite a few categories of funding. So let's take a look at them one at a time. When you buy something for use in your business, perhaps it's a physical item for manufacturing, you will be given a certain amount of time to pay for it. Those are called credit terms.
If you bought something with a credit card, the credit company that issued the card will give you 30 days. These are forms of financing. To get an extension perhaps you have difficulty with some cash flow requires a relationship with that supplier. You can manage it slowly. things down from time to time. But you generally want to have a good credit record and pay on time even if it's 30 days later.
Customers and partners can prepay for shipments of heavy equipment or large custom orders for them, whether it's software hardware or something for life support. You can also ask large companies to pay them what they owe you called a receivable in exchange for increasing their position and the priority of something that you're delivering to them perhaps at some key high tech product for a larger system. You can also get cash from people that want to invest in the shares in your company from strategic partners. These can include large corporations that have large systems, yours is one small part they add to it for their original equipment manufacturing under their brand. They will also Often invest, distributors of your products and independent sales representatives all know a hot product when they see it and will often come to you and say we'd like to invest in your business.
Customers and partners can be a good source of startup financing. Let's take a look at banks and then some other forms of related financing. Most countries have a government assisted loan program. The example in the United States is that if your loan goes bankrupt, your company can't pay it back. The bank that lent it to you can go to the US government and get 80% of the last money back. The cost will be a prime rate best borrowers rate plus a few percentage points on top of it.
It's not terribly expensive. However, to get that loan from a small business administration takes a lot of paperwork. It's very time consuming and very bureaucratic. The slowness increases the risk and there are more people applying, then there's money for. As a result, you really don't know if you'll ever get your loan, but it is a source of financing for small businesses. growth capital occurs once you've got a product in the market and are regularly selling.
In this case, the bank will say how much money do you expect the customers to pay back in the form of receivables. And we'll give you about half of that and alone. They'll take security on the receivables and rely on your ability to generate cash flow strength over time. They'll only focus on domestic customers that are near them and they will not secure inventory but everything else so that if the loan goes back they have something to fall back on. Again, they'll charge the prime rate plus a few percentage points. Especially banks do this such as Silicon Valley Bank for startups that are related to venture capital funded businesses.
When are you eligible? Well, basically when you're selling, you don't always have to be profitable. But you do need to be credible. Your management needs to know the bankers. Spend time with them get to know them well before you win, you need growth capital. Another form of growth capital is factoring and this is a bank, which will come to collect your receivables by buying them from you and taking the risk that customer may not pay.
In textiles and toys, it's very common. There are other industries that have been doing it in recent years. Some might consider it an act of desperation, but when you buy something and nine months ago, and use it to manufacture something for sale and the Christmas season where 80 85% of your sales occur, then when the customers send you their invoice, And checks and things are exchanged, you end up receiving the money. Well, that's a long wait to pay those original people. And as a result, selling your receivables before the customers pay you is one way of accelerating your payment to the obligations you have to your suppliers. It can be very expensive and you'll basically get 97 cents for every dollar of receivables.
And that's not inexpensive. Those are venture capital cost rates of money. It's one reason factoring is a good business for those banks. Another form of loan is nicknamed venture debt. It's not from a classical bank, and it's not from a classical venture capital firm, it's a combination. They will give you a loan and have a stock option called warrants so that they could buy some shares if they decided to in your company.
It's not a form of debt convertible into stock. It's just plain alone, and it's increasingly used. It's called quicker to raise than venture capital, which can take months. And the prime rate is not much more expensive when the points are added to it to get you their total interest rate. Many of these venture debt deals include attach warrants, these are nicknamed equity kickers. And as a result, if you succeed, and you were, let's say, snap, you might be able to get a huge amount of return way beyond the interest rate on that loan.
This source of debt venture debt augments other sources of funding. It's not a big substitute, but it can save you a significant percentage point or two or three or four in the ownership where you don't have to sell shares and dilute your percentage any further. Think about what one or 2% Facebook was worth when they went public. If you can save that and keep that for yourself and employees. That's quite valuable. leasing for computers and work furniture is another form of lending.
It's secured mostly on equipment. The prime rate plus three or seven points is about the range you can expect. And they want their money back in three to five years similar to other venture debt. This venture leasing is similar to venture debt in that they have attach warrants and equity kickers and also augment other sources of funding, but it's typically not very large. Yes, you can get money from a landlord, for instance, if they have a new building unoccupied, you can get some free rent one or two months is common on a new building. If the building has been around, you're in a recession and you can see right through that building, there's no one in it right through the windows, then they're in a position to extend a lot of rent as much as a year or 18 months to get you started.
That's a form of financing isn't it? And some of them will put in Cash becoming angels. This has been well known in places like Silicon Valley. And it's also often seen in developing countries where everyone from people in the restaurant business to other related local businesses are in a position to be able to supply money like this being a landlord. Another category is government assisted funds for someone that might need a small factory or office to do some light manufacturing. These are in the United States are called us industrial revenue bonds, they're bonds that's a debt with interest rate, to build something and then lease it to you.
It's a long term loan at a pretty cheap interest rate and the investors that buy those bonds and supply the cash from the public are able to receive the interest without being taxed. They're tax free bonds. It's great for smaller regions of the country if you're trying to do something in a small town. Sound like Telluride, Colorado far away from busy Denver, or up in Boise, Idaho or Albuquerque, New Mexico and need a factory this can work very well. You'll sign a lease for a long time, and you'll will need a lawyer to help you do this program. Other countries have similar programs.
All right, one more employers and yes, employers can finance your startup rather than fire you for thinking about one. For instance, there may be an employee who's a star, I've seen it in high tech companies where a brilliant person has come across and cool technology. However, the company that employs that person is not interested in pursuing it, it doesn't fit their strategy. So rather than say, hey, um, you know, drop it and get back to the grindstone. They'll often let the star go off buying it for a small amount of money, perhaps putting in some Cash, and out goes the employee with the idea. That's called a spin out.
These have in the past also generated what we call internal startups, which are funded with real cash by the company and has a future which often involves buying that back later. Cisco has done this several times successfully. The employer begins with an idea for and the technology develops and boom, all kinds of things come out of it. That's the fun part of being a part of a high tech company. It's rare, however, and this favorite employee is really important and they don't want to really get this employee to angry and upset so often say, hey, go off and do it and give us a call when you're ready to come back. The buyout is different.
These are called leveraged buyouts. It's similar to buying your house with 10% down and 90% equity as a result of the risks for startups, these are getting a high interest rate. And these are nicknamed junk bonds as a result, Michael Milken made them very famous. It does require a steady cash flow to repay them. However, as a result of this, they've been in the grocery business. Everyone needs food provided a pretty steady cash flow.
And the people that bought Safeway from its owner, were able to take it private, put in the money, repay all of the debt and own Safeway. Eventually, being able to take companies like that public allows you to have a lot of cash in the bank. In this case, the founders decided that they would put some money to work in their favorite hobby, which was American baseball. The result was they bought the San Francisco Giants Macy's, how did they do with leveraged buyout? Well, they're in the fashion business things go up and down, down and up and up and down unpredictably. ended up in bankruptcy.
So keeping in mind before you consider a leveraged buyout, a spin out is different. The joint venture would be two corporations such as one in technology and one in marketing, forming a brand new company. And as a result, you get a combination like that that can work and cell phones. Ericsson had much better technology than marketing and Sony had much better marketing than technology. They decided to team up and create a third company for the cell phone businesses in combination. It can be a career opportunity for you to spot that as an employee of one of the large corporations and head off to newco and become part of a real startup out of necessity and focus.
A company like North American Rockwell in defense aerospace, found that the modem business for the military dial up to computers in the field had grown In enormous proportion in size in a retail market there was going up and down and going crazy with things that they did not understand as industrial experts. Some people employees of North American Rockwell said we'd like to buy the modem business which owned almost all of the 80 90% of market share for modems and off they went. They then called the company Connect sent focused on things at the beginning and end of optical fiber and went public very successfully. In a defense conversion TRW, the conglomerate had electronic systems labs incorporated as a division and had found in the business they could do some wonderful things with guarding telecommunications. They were in the black dark room work secret kind of business.
They had discovered that they could block fraudulent use of cell phones. As a result, they asked for some help. I happened to be there at the time, and we were able to spin the company out, put the technology in it, get Kleiner Perkins to help lead the financing, and the company went public as Corsair Incorporated. Those are three examples of spin outs, often from what we call a spinning Nova. Google is evidencing signs of that in ninth 2017 they spun out a automated automobile software company they chose to call Wei Mo. So as a result, you've got more of this occurring all the times they tune, watch, listen to the rumors and it might be a career move for you.
Internal startup goes the opposite direction of spin in. For example, plus development in Silicon Valley was making disk drives for large mainframes. along comes the personal computer era tirely different business retail, not industrial, huge quantities. Instead of small, and the CEO Mr. Patterson decided that he'd create a separate company from quantum. And they called it plus development. At the time it was getting ready to go public.
It was a highly successful quantum purchased back from the owners though and performer employees. And as a result, the plus developments startup people got instant IPO and quantum stock everybody did very well. Apple Computer got started. Mr. Jobs decided that software could be used successfully by the windows world and make some money. It caught on he later decided that wasn't so good to feed the windows world and as a result bought klaris back into apple. The Clara's employees got Apple stock instantly IPO.
Cisco has done this several times with internally funded startups also being successful. The buyout formula is basically the equivalent of initial Public Offering, when you're going to get ready for the initial public offering, the contract written by the owner of the technology that got you started says that we get to buy you back if we want to at that price. I'd like to see it used more often. It's very clever. Okay, that's quite a list, isn't it? And that's a lot of sources for money for you to consider along the way.
These alternatives, you should now put together from venture capital all the way down to these other sources and begin to put together a true financing plan for the various stages you're planning on going into for your startup. Where are the sources of the startup money? It's simple, they're everywhere. There is no shortage literally around the world. No matter what the bloggers write about. Your job is to pick the best from where the money is along the way.
Our next snippet is going to focus on the process for raising that kind of money. That's what is terribly important now that you figure out is frankly, quite easy and quite straightforward. So that's what the snippets about. Let's get set on going there now. I look forward to seeing you there. Bye for now.