Financing the Small Business Start-up 19.1

Most start-up funds come from an entrepreneur’s personal resources such as savings; however, there are common sources of funding.

Entrepreneurial Resources Short-term needs are associated with activities that are not part of normal operations Start-up cost Seasonal Sales Long-term needs relate to preparation for future growth Purchase of capital assets, ex. equipment & facilities

Entrepreneurial Resources Bootstrapping involves operating as frugally as possible and cutting all unnecessary expenses. Accomplished by Borrowing Leasing Partnering to acquire resources Consists of Hiring as few employees as possible Leasing anything you can Being creative Request longer payment terms from suppliers Require customers to pay in advance or pay half up front Sell account receivables to a factor Factor: an agent who handles an entrepreneur’s accts. Rec. for a fee

Entrepreneurial Resources Start-up Money Personal resources include Friends Family Others who believe in the entrepreneur Start saving now Identify people and others resources you can approach in the future when needed

Financing the Start-up Equity Capital is cash raised for a business in exchange for an ownership stake in the business. Equity – an ownership in a business Risk capital – money invested in companies where there is financial risk Sources of Equity Capital Personal Savings: entrepreneurs should contribute more than half of the start-up capital

Sources of Equity Capital Friends & Family Private Investors Angel: private investor who funds start-up companies Nonprofessional Believe in the business concept and founding team Found through networking Partner

Sources of Equity Capital Venture Capital is a source of equity financing for small businesses with exceptional growth potential and experienced senior management Venture Capitalist are a pool of investors Primary goal: to make money for investors Rarely fund start-up ventures Provide funding in high-tech, high growth areas State-sponsored Venture Capital Funds Encourages the creation of new businesses and jobs

Financing the Start-up Debt Capital is money raised by taking out loans. Allows owner to maintain full ownership of the business Carried as a liability Sources of Debt Capital Banks Operating capital, also known as working capital, is money used to support operations in the short term.

Sources of Debt Capital Trade Credit a source of short-term financing provided by one business within another business’s industry or trade. Minority Enterprise Development Programs Support owners that are 51% ethnic minority, female, or disabled Also assist w/securing contracts and find strategic parnters.

Sources of Debt Capital Commercial Finance Companies SBA (Small Business Admin.)Loan Guarantee repayment to lender of up to a max of 90% of the loan should the business fail. Lend to qualified veterans & people with disabilities SBICs (Small Business Investment Companies) Privately managed venture capital companies Licensed by the SBA to provide equity & debt financing to young businesses Invest in start-up ventures about twice as often as venture capitalists

Financial Planning for Your Business Finding the right financial resources at the right time in the right amount Provides a better chance of securing the money needed Starts with identifying your business’s stages of growth Identify critical milestones that require resources Identify business advisers that can introduce you to funding sources Hiring the best management expertise