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Financing Your Business Back to Table of Contents.

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Presentation on theme: "Financing Your Business Back to Table of Contents."— Presentation transcript:

1 Financing Your Business Back to Table of Contents

2 Financing Your Business 2 Chapter 19 Financing Your Business Financing the Small Business Start-Up Obtaining Financing and Growth Capital

3 Financing Your Business 3 Describe the resources available to entrepreneurs to start their businesses. Compare and contrast sources of financing for start-up ventures. Describe the importance of financial planning. Section 19.1 Financing the Small Business Start-Up 19.1

4 Financing Your Business 4 Entrepreneurs use their creative talents to secure necessary resources to start their businesses. Most start-up funds come from an entrepreneurs personal resources; however, there are other common sources of funding. Section 19.1 Financing the Small Business Start-Up 19.1

5 Financing Your Business 5 Entrepreneurial Resources One of the unique talents of entrepreneurs is finding the resources to launch a business requires the understanding of: Section 19.1 Financing the Small Business Start-Up Short-term needs, those associated with activities not part of normal operations Long-term capital needs, relating to preparation for future growth.

6 Financing Your Business 6 Bootstrapping Most entrepreneurs get their businesses started by bootstrapping. bootstrapping operating a business as frugally as possible and cutting all unnecessary expenses, such as borrowing, leasing, and partnering to acquire resources Section 19.1 Financing the Small Business Start-Up

7 Financing Your Business 7 Bootstrapping Bootstrapping involves: Section 19.1 Financing the Small Business Start-Up hiring as few employees as possible leasing anything you can being creative

8 Financing Your Business 8 Bootstrapping Bootstrapping entrepreneurs can also ask suppliers to allow for longer payments terms, ask customers to pay in advance, or sell their accounts receivable to a factor. factor an agent who handles an entrepreneurs accounts receivable for a fee Section 19.1 Financing the Small Business Start-Up

9 Financing Your Business 9 Start-Up Money The main sources for start-up money for entrepreneurs include: Section 19.1 Financing the Small Business Start-Up friends family other resources, such as savings, credit cards, loans, and investments

10 Financing Your Business 10 Financing the Start-Up Some sources of financing include: Section 19.1 Financing the Small Business Start-Up banks finance companies investment companies government grants

11 Financing Your Business 11 Sources of Equity Financing To obtain equity capital as a source of funding for a business, the owner must give equity to obtain the financing. equity capital cash raised for a business in exchange for an ownership stake in the business Section 19.1 Financing the Small Business Start-Up equity capital an ownership in a business

12 Financing Your Business 12 Sources of Equity Financing Equity funding is sometimes called risk capital. risk capital money invested in companies where there is financial risk Section 19.1 Financing the Small Business Start-Up

13 Sources of Equity Financing 13 Forms of Equity Financing Personal savings Friends and family Private investors Partners Venture capitalists State- sponsored venture capital funds Section 19.1 Financing the Small Business Start-Up

14 Financing Your Business 14 Sources of Equity Financing An angel often invests because of his or her belief in a business concept and the founding team. angel a private, nonprofessional investor, such as a friend, a relative, or a business associate, who funds start-up companies Section 19.1 Financing the Small Business Start-Up

15 Financing Your Business 15 Sources of Equity Financing An existing business can use venture capital financing to raise large amounts of money to achieve its goals. venture capital a source of equity financing for small businesses with exceptional growth potential and experienced senior management Section 19.1 Financing the Small Business Start-Up

16 Financing Your Business 16 Sources of Equity Financing Venture capitalists often provide managerial and technical expertise to small businesses. venture capitalists individual investors or investment firms that invest venture capital professionally Section 19.1 Financing the Small Business Start-Up

17 Financing Your Business 17 Sources of Debt Financing Sources of debt capital are far more numerous than sources of equity capital, but the entrepreneur must be certain the business can generate enough cash flow to repay the loan. debt capital money raised by taking out loans, which must be repaid with interest Section 19.1 Financing the Small Business Start-Up

18 Sources of Debt Financing 18 Sources of Debt Financing Banks Trade credit Minority enterprise development programs Commercial finance companies SBA loans Small business investment companies Section 19.1 Financing the Small Business Start-Up

19 Financing Your Business 19 Sources of Debt Financing Banks were once the primary source of operating capital, but today they are much more conservative in their lending practices. operating capital money a business uses to support its operations in the short term Section 19.1 Financing the Small Business Start-Up

20 Financing Your Business 20 Sources of Debt Financing An established business can usually get a line of credit from a bank, which it can borrow against. line of credit an arrangement whereby a lender agrees to lend up to a specific amount of money at a certain interest rate for a specific period of time Section 19.1 Financing the Small Business Start-Up

21 Financing Your Business 21 Sources of Debt Financing Some businesses may seek trade credit from other companies in their industry as a form of debt financing. trade credit credit one business grants to another business for the purchase of goods or services; a source of short-term financing provided by one business within another businesss industry or trade Section 19.1 Financing the Small Business Start-Up

22 Financing Your Business 22 Financial Planning for Your Business Financial planning involves finding the right kind of financial resources at the right time in the right amount. Section 19.1 Financing the Small Business Start-Up

23 Financing Your Business 23 Financial Planning for Your Business Financial planning involves: Section 19.1 Financing the Small Business Start-Up Identifying the stages of growth in your business Identifying milestones that require resources Identifying business advisers Hiring an excellent management team

24 Financing Your Business 24 Describe the information needed to obtain financing. Explain the types of growth financing available to entrepreneurs. Describe how to calculate start-up capital requirements. Section 19.2 Obtaining Financing and Growth Capital 19.2

25 Financing Your Business 25 Additional sources of funding become available when entrepreneurs are ready to grow their businesses. Entrepreneurs must calculate their start-up needs so they can communicate this information to potential funders. Section 19.2 Obtaining Financing and Growth Capital 19.2

26 Financing Your Business 26 How to Obtain Financing To obtain financing, you must create pro forma financial statements to include in your business plan. pro forma proposed or estimated financial statements based on predictions of how the actual operations of the business will turn out Section 19.2 Obtaining Financing and Growth Capital

27 Financing Your Business 27 What Venture Capitalists Expect Venture capitalists rarely invest in start-up companies, but when they do, they expect: Section 19.2 Obtaining Financing and Growth Capital A 30 to 70 percent return on their investment for start-ups A 50 percent or more return for an early stage venture A business with good management

28 Financing Your Business 28 What Private Investors Expect Private investors, or angels, expect: Section 19.2 Obtaining Financing and Growth Capital businesses they understand investing with like-minded investors ten times their investment at the end of five years a strong management team

29 Financing Your Business 29 What Bankers Expect Commercial lenders like banks rely on the five Cs to determine the acceptability of a business loan applicant: Section 19.2 Obtaining Financing and Growth Capital C C C C C Character Capacity Capitol Collateral Conditions

30 Financing Your Business 30 What Bankers Expect A bank must believe in the character of the entrepreneur. character a borrowers reputation for fair and ethical practices, including business experience, dealings with other businesses, and reputation in the community Section 19.2 Obtaining Financing and Growth Capital

31 Financing Your Business 31 What Bankers Expect Banks consider the capacity of a business to pay its debts. capacity the ability of a business to pay a loan in view of its income and obligations Section 19.2 Obtaining Financing and Growth Capital

32 Financing Your Business 32 What Bankers Expect Banks place a strong emphasis on whether a business has a financially stable capital structure. capital the net worth of a business, the amount by which its assets exceed its liabilities Section 19.2 Obtaining Financing and Growth Capital

33 Financing Your Business 33 What Bankers Expect Banks are more likely to lend to businesses with valuable collateral. collateral security in the form of assets that a company pledges to a lender Section 19.2 Obtaining Financing and Growth Capital

34 Financing Your Business 34 What Bankers Expect Banks consider all the conditions in which the business operates. conditions the circumstances at the time of the loan request, including potential for growth, amount of competition, location, form of ownership, and insurance Section 19.2 Obtaining Financing and Growth Capital

35 Financing Your Business 35 Types of Growth Financing If your company has established a successful track record, there are other types of financing available, including: Section 19.2 Obtaining Financing and Growth Capital venture capital (VC) companies private placements initial public offerings (IPOs)

36 Financing Your Business 36 Venture Capital (VC) Companies If a VC firm is interested in funding your business and decides you have a sound business plan, it will begin due diligence. due diligence the investigation and analysis a prudent investor does before making business decisions Section 19.2 Obtaining Financing and Growth Capital

37 Financing Your Business 37 Private Placements Private placement is a way to raise capital by selling ownership interests in your private corporation or partnership. private placement a private offering or sale of securities directly to a limited number of institutional investors who meet certain suitability standards; ownership interests are called securities Section 19.2 Obtaining Financing and Growth Capital

38 Financing Your Business 38 Initial Public Offerings (IPOs) An initial public offering (IPO) is a popular way to raise a lot of money for growth since all proceeds go to the company. initial public offering (IPO) the sale of stock in a company on a public stock exchange Section 19.2 Obtaining Financing and Growth Capital

39 Financing Your Business 39 Initial Public Offerings (IPOs) The CEO of a company that has made an IPO is primarily responsible to the people who own the company stock. stock a type of security that signifies ownership in a corporation and represents a claim on part of the corporations assets and earnings Section 19.2 Obtaining Financing and Growth Capital

40 Financing Your Business 40 Initial Public Offerings (IPOs) There are five steps to become a public company with stock for sale on a public exchange. Section 19.2 Obtaining Financing and Growth Capital 1.Choose an underwriter or investment banker. 2.Draw up a letter of intent. 3.File a registration statement with the SEC. 4.Announce the offering in the financial press. 5.Do a road show.

41 Financing Your Business 41 Calculating Your Start-Up Capital Needs You will need to calculate exactly how much money you will need to start or grow your business. This requires estimating start-up costs, capital expenditures, working capital (operating costs), and contingency funds. Section 19.2 Obtaining Financing and Growth Capital

42 Financing Your Business 42 Start-Up Costs Start-up costs are those costs you incur before you start a business. Section 19.2 Obtaining Financing and Growth Capital

43 Financing Your Business 43 Start-Up Costs Start-up costs may include: Section 19.2 Obtaining Financing and Growth Capital furniture, fixtures, and equipment promotion expenses and office supplies fees and licenses

44 Financing Your Business 44 Operating Costs Operating costs, often referred to as working capital, cover the time between selling your product or service and receiving payment from the customer. working capital the amount of cash needed to carry out the daily operations of a business that ensures a positive cash flow after covering all operating expenses Section 19.2 Obtaining Financing and Growth Capital

45 Financing Your Business 45 Contingency Funds Since no one can predict the future, you should include a contingency fund in your start-up calculations. contingency fund an extra amount of money that is saved and used only when absolutely necessary, such as for unforeseen business expenses Section 19.2 Obtaining Financing and Growth Capital


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