SMALL BUSINESS MANAGEMENT Chapter 7 Financing 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 power  equity spreads ______ of failure

Disadvantages of Equity Financing F dilutes ______ and independence F disagreements F compromises F 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