Page 88 - Azerbaijan State University of Economics

Ali Y. Abbasov: Modern Venture financing options in the U.S.A.

units, will also be attracted to invest in small businesses with strategically complementary products,

sound management and solid growth potential. Finally, firms will also make use of working capital

through trade credit with vendors or advanced payments from customers.

Local or regional commercial lenders providing traditional bank loans are the primary

source of capital for small businesses (Mullen, 2012; Sherman, 2012). Bank loans come in

various forms, typically identified by the term of the note. Short term notes have a period of less

than a year. These loans are typically issued in the form of a promissory note and may be

secured by accounts receivable or inventory (Sherman, 2012). Some firms may utilize operating

lines of credit where a credit facility is approved and funds may be borrowed as needed in the

form of draws or tranches. Funds borrowed through lines of credit are usually paid within one-

to-three years and have either fixed or variable rates based on the date the tranche is funded.

Interim financing is also offered by banks providing loans with maturities from three to five

years. Interim loans are usually utilized for purchases of furniture, equipment, fixtures or other

operating capital. Finally, long term loans, having terms exceeding five years, but typically not

longer than twenty, will primarily be used for acquiring real estate, with the building or land used

by the lender as collateral (Sherman, 2012).

In addition to banks, wealthy individuals, corporations and institutional investors make funds

available to venture capital (VC) firms who funnel capital to various types of business based on their

industry, stage of business life cycle, or geographic location (Sherman, 2012). Large corporations

will also form business units to manage Corporate Venture Capital (CVC) which is allocated to

companies whose strategy aligns with the business needs of the corporation (Sherman, 2012).

Venture capital deals are typically structured as purchases of preferred stock, but can also

take the form of a convertible debenture which starts as debt with the option to convert to equity,

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