Financing Your Business 13 Financing Your Business Section 13.1 Start-Up Investment Section 13.2 Obtaining Financing

Section 13.1: Start-Up Investment Describe start-up capital and explain how payback is calculated Explain bootstrapping strategies Section 13.1: Start-Up Investment

Start-Up Investment Start-up investment is the one-time sum required to start a business and cover the start-up costs. Start-up expenditures are those expenses associated with opening a new business. Cash reserves are needed for an emergency fund and a reserve for fixed expenses. The emergency fund is the amount of money a business should have available in the first three to six months for the emergencies that often arise when a company is just beginning. Businesses establish a reserve to cover their fixed expenses for at least three months. The reserve for fixed expenses is maintained for the life of the business and is used if the company should experience a downturn in sales. Section 13.1: Start-Up Investment

Start-Up Investment ÷ Net Profit per Month = Payback (in Months) Payback is the amount of time, measured in months, that it takes a business to earn enough in profit to cover the start-up investment. Start-Up Investment ÷ Net Profit per Month = Payback (in Months) Section 13.1: Start-Up Investment

Bootstrapping Bootstrapping means starting a business by yourself, without any outside investment. Many successful entrepreneurs began their businesses by bootstrapping, or with very little borrowed money, through such strategies as: Using personal savings Using credit cards Section 13.1: Start-Up Investment

Section 13.2: Obtaining Financing Identify the advantages and disadvantages of debt financing Identify the advantages and disadvantages of equity financing Describe some specialized sources of financing Describe how debt and equity financing affect the balance sheet Section 13.2: Obtaining Financing

Debt Financing Debt financing is when you borrow what you need to start your business. This increases your company’s debt. There are three main sources of debt financing: Banks are the major source of debt financing for entrepreneurs. To determine how much it might be willing to loan you, the bank will review your business’s debt-to-equity ratio. Credit unions are nonprofit cooperative organization that offer low-interest loans to members. Relatives and friends are a common source of start-up loans for many entrepreneurs. Section 13.2: Obtaining Financing

Equity Financing Another method of financing a start-up is to sell shares of ownership in the business. This method is called equity financing. There are three main sources of equity financing: Relatives and Friends. As with debt financing, relatives and friends are a source of start-up capital for many entrepreneurs. Unlike debt, however, they will take a share of your company. Angels and Venture Capitalists. An angel is an investor who is interested in financing start-up ventures. Venture capital is money that is invested in a potentially profitable business by a specialized company whose purpose is to invest in start-ups. Partners. The most common source of equity financing is giving a percentage of the ownership of a business to a partner. Section 13.2: Obtaining Financing

Specialized Sources of Financing There are four specialized sources that may provide either debt or equity financing: Small Business Investment Companies (SBICs). Provide equity financing, as well as loans, for small businesses. Minority Enterprise Small Business Investment Companies (MESBICs). These are private investment firms, chartered by the Small Business Administration, that provide both debt and equity financing for new small businesses. Customer Financing. This can be either debt or equity financing. Barter Financing. This financing method involves the trading of items or services between businesses. Section 13.2: Obtaining Financing

Effects of Financing on Your Balance Sheet What are the economic consequences of using some form of financing for your business? Debt Financing Borrowing money for a business increases its debt (liabilities). You must repay the loans or you risk losing the business. Equity Financing When using equity financing, your owner’s equity changes. With equity financing, you give up some of your company and perhaps some control. Consider the consequences of using equity financing to obtain capital. Section 13.2: Obtaining Financing