SMALL BUSINESS MANAGEMENT

Chapter 7Financing the Small Business

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?

Small Business Financing

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

Small Business Financing

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

debt capital lack of skills in ______ a proposal for financing failure to plan in advance for needs poor financial ______ of operations

Determining the Amount of Funds Needed

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

Determining the Amount of Funds Needed

Start-up Costs Initial ______ First few months rent, payroll, advertising Prepaid ______ --utility & rent deposits,

insurance Licenses & permits

Ongoing Operating Costs Prepare cash ______ statement (chapter 10)

The Owner’s Net Worth

Determining Types of Financing

Equity (Ownership) Financing Private Investors

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

Corporate Investors Government

Business Development ______ of Canada (BDC)

Canada Development Corporation (CDC) Provincial ______

Advantages of Equity Financing

no obligations for dividends or interest investor ______ equity expands borrowing powerequity spreads ______ of failure

Disadvantages of Equity Financing

dilutes ______ and independence disagreements compromises legal ______

Debt Financing

Advantages Obtain ______ ROI by using leverage

debt Interest ______ are tax deductible;

dividends from equity are not No loss of ownership control and

greater flexibility with debt financing Easier to ______ than equity capital

Debt Financing

Disadvantages Interest must be paid on borrowed

money Increased ______ requirements and

lender monitoring Total risk on ______ of the owner

Sources of Debt Financing

Private lenders shareholder loans

Corporate lenders regular ______ lending institutions

trust companies, credit unions, finance companies

chartered banks Government Lenders

May finance ______ debt , ______ equity firms May be flexible, lower rates, counseling More paper work, time to process is longer, more

monitoring & control

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 ______ 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?

Concept Checks

1. What problems are often the result of lack of management competence and experience ?

2. What are some of the operating costs involved in determining the start up capital needed ?

3. Why is it important to determine the owner’s net worth?

Concept Checks

4. What are the sources of equity financing for the small business ?

5. What are the advantages and disadvantages of equity financing ?

6. What are the advantages and disadvantages of debt financing ?

Concept Checks

7. What are the major sources of debt financing ?

8. What are the potential advantages and disadvantages of borrowing through government lenders ?

9. What criteria do lenders use in making the loan decision ?

Concept Checks

10. What can the entrepreneur do if he/she is unsuccessful in obtaining financing ?

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