Funding Sources

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There is no one correct method to fund a sport business. Some people acquire a sport business through inheritance and do not need any fundsto become owners. This is the case for many professional team owners, such as the Rooney family, who have owned the Pittsburgh Steelers for several generations. Other owners have tapped numerous sources such as their credit cards, relatives, and bank loans to keep a business alive. Each business is different and requires its own unique blend of financing. The various funding techniques will be addressed in this chapter.

The total number of options and techniques that can be used to obtain funds is limitless. Some people have made their fortunes through luck, whereas others have relied on hard work. Arthur Rooney, the famed owner of the Steelers, bought the franchise for $2,500 in 1933. It is rumored that he obtained the money for the franchise by winning $250,000 at the horse track in 1932 (Pro Football Hall of Fame, 2007). John Moores, former owner of the San Diego Padres, founded BMC Software in 1980. By working hard, designing innovative products, and making a strong marketing push, he made a fortune (“Company,” 2012). With these funds, he purchased the Padres. Dallas Mavericks owner Mark Cuban; Microsoft cofounder, Portland Trail Blazers, and Seattle Seahawks owner, Paul Allen; and Los Angeles Clippers owner, Steve Ballmer, made their fortunes in computer software before buying their teams.

A person lucky enough to win the lottery could use their winnings to start a business. Former athletes have taken the money that they earned in professional sport and used those funds to launch or buy a business. One example is Magic Johnson, who turned his winning form and smile into a major fortune in real estate and movie theaters. In 2012, he became a part owner of the Los Angeles Dodgers in a record-breaking, $2.15 billion deal. Another basketball legend, Michael Jordan, turned his fortune into owning a majority share of the Charlotte Hornets and has made hundreds of millions of dollars from his collaboration with Nike on the Jumpman brand. In yet another example, Mario Lemieux was owed a fortune by the Pittsburgh Penguins and was the largest debt holder for the team. He purchased the team in bankruptcy proceedings. Most recently, retired baseball legend Derek Jeter used the fortune he accrued throughout his playing career to become a part owner of the Miami Marlins.

Although this chapter and chapter 10 on stocks and bonds highlight for-profit businesses, we make some references to funds used by government and tax-exempt businesses. As with for-profit businesses, both government and nonprofit organizations can use countless techniques to raise funds. One of the major differences between government and nonprofit organizations is the opportunity to receive gifts and the potential tax consequences associated with such funding techniques.

Most fund-raising for sport businesses follows established patterns that countless organizations have used for years. This chapter highlights the basic approaches to raising funds without necessarily having to incur significant costs or sell owners’ equity. Early in the chapter we examine basic funding sources for starting a business, such as personal bank loans, credit cards, and government assistance. The chapter then covers open markets and short-term borrowing options, followed by several long-term borrowing options. The chapter concludes with an analysis of funding options for minority-owned businesses, including advice on how to obtain funding.

WHERE THE MONEY COMES FROM Most consumers have faced a financial crisis in which they needed money but found that sources of funds were lacking. Some people can approach their parents and ask for a loan. Money sometimes comes from an inheritance or in the form of a raise. Increased monetary streams are sometimes expected—such as an annual cost-of-living salary increase to keep a salary at pace with inflation. At times money might not come in when it is expected. You might anticipate receiving a tax refund by a certain date and have to change your plans significantly if a delay occurs. But what happens when you need a substantial amount of money and your likelihood of receiving a major gift is astronomically small? You need to analyze alternative approaches for raising the needed capital.

Not all capital needs arise from emergencies. Numerous capital structuring changes occur because of anticipated growth—growth that can occur only through the exploration of various capital financing options. This chapter deals with the various capital options available to those seeking to raise needed capital. We give special attention to individual borrowing, SBA (Small Business Administration) loans, commercial lending, and venture capital. Other chapters will cover issuing various types of stocks, issuing bonds, and obtaining capital assistance from the government. There is no one correct method of raising funds, and this chapter presents the diverse techniques available.

Personal Resources Sometimes people accumulate money from a current job with the intention of someday starting their own businesses. Often these sums are wholly inadequate for that purpose. Industry professionals highlight the need to set aside at least two years’ worth of living expenses in preparation for starting your own business. This sum is necessary because most new full-time businesses take at least a year, and sometimes many years, to earn enough profit to pay the business owner a salary. Proper financial planning can help eliminate numerous hurdles that might arise during the formative years of a business. But the planning process needs to begin long before a business starts up, and sufficient capital reserves are required to sustain the business through cyclical and seasonal downturns.

If you do not have enough cash or investments that could be liquidated to start the business, you might consider a home loan. Home equity financing requires a borrower to use their house as collateral when obtaining a loan from a bank or other lending institution. The loan amount is based on the equity that the borrower has in the home. Suppose that you have a house that is worth $300,000 on the market today. You paid $180,000 for the house 10 years ago, with $30,000 down and a $150,000 mortgage. You have paid off $60,000 on the mortgage and still owe $90,000. The difference between the value and the amount owed is $210,000, which represents the equity that you have in the house and is the maximum amount that you could borrow from a lending institution.

Home equity loans are traditionally favored over other loans because they carry a lower interest rate. Furthermore, some banks are willing to lend more than 100% of a home’s value, depending on what the loan proceeds will be used to purchase. New businesses are highly speculative, and only 20% of new businesses survive. Therefore, some banks require substantial equity before loaning to a new business; established businesses with significant financial history are more reliable, and owners of these businesses can obtain larger mortgages.

Although most financial advisers do not recommend borrowing on a credit card because of the high interest rates, credit cards can also generate funds from which to start a business. But anyone using this method of borrowing must be careful to repay the debt as quickly as possible because the interest charges will negate any potential benefits that could have accrued from not having to approach other lenders such as

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.edu banks. Furthermore, the high rate of small business failures should serve as a warning that a business owner could be paying off debts for years after a business fails. With a high interest rate, the repayment obligation could force an individual into bankruptcy.

The key to using credit cards is to maintain a good credit rating. Especially if using personal credit cards, borrowers need to be vigilant in ensuring that purchases and repayments do not hurt their credit rating. A credit rating can plunge if the credit card bills are not paid on time or if payment is always late (see How Credit Card Applicants Are Rated sidebar).

Can the Government Help You Get a Bank Loan? A spotty credit history might limit a person’s ability to obtain bank financing. The government, however, has developed several programs to help small businesses borrow funds, even if the owner does not have an unblemished credit history. The federal government realized the need for helping small businesses in the 1950s. In 1953 it created the Small Business Administration to “aid, counsel, and protect the interest of