Dollinger index

Foundations of New Venture Finance 263

loan. Lenders are most concerned about payback and collateral and try to match the

term of the loan with the life of the asset.

• The level and trend in the stock market: A high and rising stock market means peo-
  ple have cash and are willing to accept more risk in investing. A falling market makes
  investors more conservative.


• The health of various financial institutions, such as savings and loans, commercial
  banks, and international financial institutions: Institutions under pressure are very
  conservative and likely to invest only in ventures that are virtually risk free.


• Level of confidence in the economy: High confidence promotes liberal investing.


• Government monetary and fiscal policy: When the government is running large
  deficits and basically monetizing the debt, there are inflationary consequences.
  Inflation weakens the currency and benefits borrowers. When the central bank (the
  Federal Reserve Bank in the United States) targets inflation to counteract govern-
  ment spending, the deflationary effects benefit lenders (the bond market).
  The entrepreneur and the top management team need to be sensitive both to threats to
  the successful financing of the venture (such as low consumer and producer confidence)
  and to special opportunities such as government finance programs and subsidies.

ÀÀÀÀÀ

New debt issue

Liquidity

level

Debt:

Short-term notes

Medium-term debt

Bonds

New stock issue

Dividends

Principal

repayment Ta xshield

Interest

payments

Equity

investors

Net permanent

working capital

Ta xe s

Replacement of

existing fixed assets

Investment in new

product lines

Permanent capital Capital expenditures

Stock

repurchase

ÀÀÀÀÀ

ÀÀÀÀÀ

ÀÀÀÀÀ ÀÀÀÀÀ

ÀÀÀÀÀ

¾

¾

¾

½

½

FIGURE 7.3 Permanent Sources of Venture Financing

½

SOURCE: Adapted from E. Walker and J. Petty, Financial Management of the Small Firm, 2nd ed. (Upper Saddle River, NJ:
Prentice-Hall, 1986): 144.