SMALL BUSINESS MANAGEMENT

Chapter 6Financing the Small Business

Crowdfunding

Cottage cheese cakeMolly Maid

Game Developer

BrandMan

Mia Yogurt

Small Business Financing

The entrepreneur often require financing not only to start the business but also to provide capital to fund ongoing operations

Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Small Business Financing

The Importance of Capital and Planning How much do you need ? When will the funds be used ? How long will the money last ? Where can the money be raised and what

type of financing (debit versus equity) will be used ?

Do you need funds immediately ? Will I get anything else besides money ?

Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Cottage Cheesecake Industry

What aspects of Brad Miller's background would be positive for him to obtain financing for his business? What aspects would be negative?

What are the advantages and disadvantages of equity financing for this business?

What other sources of financing might he have accessed?

Cottage cheese cake

Small Business Financing

Reasons For Financing of Ongoing Operations New Products and Services Acquisition / Joint Venture Expansion Capital expenditures Working capital needs

Small Business Financing

Other management problems affecting financing underestimating financial requirements lack of knowledge of sources of equity and

debt capital lack of skills in presenting a proposal for

financing failure to plan in advance for needs poor financial control of operations

Determining the Amount of Funds Needed

Start-up Costs Ongoing Operating Costs The Owner’s Net Worth

Capital requirements = start-up costs + operating requirements – owner assets available for investment

Determining the Amount of Funds Needed

Start-up Costs Initial inventory, hiring costs, physical

space First few months rent, payroll, advertising Prepaid items --utility & rent deposits,

insurance Licenses & permits

Ongoing Operating Costs Prepare cash flow statement (chapter 10)

The Owner’s Net Worth

new business is a retail establishment promotion, you plan to give

buyers 90 days to pay

Buy initial inventory

Buy replacement inventory

+

plan for this working capital need in advance, If not,you probably won't even

stay in business for 90 days.

Determining Types of Financing

Equity (Ownership) Financing Private Investors

Self, bootstrapping, friends, family, private, employees, sale of shares

Corporate Investors Venture capitalist (vulture capitalists)

Government Business Development bank of Canada (BDC) Canada Development Corporation (CDC) Provincial Programs

Molly Maid

Advantages of Equity Financing

no obligations for dividends or interest

investor expertise

equity expands borrowing power

equity spreads risk of failure

Disadvantages of Equity Financing

dilutes ownership and independence

Disagreements

Compromises

legal costs

Determining Types of Financing

Equity Financing Personal Funds Family and Friends Crowd-Funding Informal Risk (Angels) Corporate Investors Government

Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Crowdfunding

Mia Yogurt

Debt Financing

Advantages Obtain higher ROI by using leverage debt

Interest costs are tax deductible; dividends from equity are not

No loss of ownership control and greater flexibility with debt financing

Easier to obtain than equity capital

Debt Financing

Disadvantages Interest must be paid on borrowed

money

Increased paperwork requirements and lender monitoring

Total risk on part of the owner

Sources of Debt Financing

Private lenders shareholder loans

Corporate lenders regular private lending institutions

trust companies, credit unions, finance companies chartered banks

Government Lenders May finance high debt , low equity firms May be flexible, lower rates, counseling More paper work, time to process is longer,

more monitoring & control

Game Developer

Determining Terms of Financing

Types Short term (demand), medium term,

long term Sources

banks, private sources, factors, confirming houses; term lenders, leasing companies, foreign banks; trust companies

Preparing A Proposal to Obtain Financing

Criteria Used in the Loan Decision 1. The Applicant’s Management Ability

How much the applicant knows about the business

How much care was taken in preparing the proposal Lending proposal document (fig 7-10)

cash flow & income statement & Balance sheet ( chapters 3

& 10 ) Owners Salary & contingencies

Preparing A Proposal to Obtain Financing

Criteria Used in the Loan Decision 2.The Proposal

level of working capital Current assets – current liabilities

current ratio 2:1 quick ratio 1:1 debt-to-equity ratio

Collateral

Preparing A Proposal to Obtain Financing

Criteria Used in the Loan Decision 3. Applicant’s background and

creditworthiness personal information present debt and past lending history amount of equity the applicant has

invested will the applicant bank with the lender

Lender Relations

Clarks Sporting Goods

Q 1. Estimate how much money Dave will need from outside sources to start his business.

Q 2. Assuming Dave receives start‑up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so how much?

Q 3. Should Dave pursue debt or equity sources of funds to get started?

Appendices

Provincial Equity Capital Programs Federal Government Assistance

Programs for Small Business Provincial Government Financial

Assistance Programs and Agencies for Small Business

Venture Capital Firms in Canada