FINANCE YOUR BUSINESS WITH EQUITY CAPITAL Equity capital is money invested in a business in return for a share in the business’s profits. Sources of equity –Personal financing –Friends and family –Venture capitalist

FINANCE YOUR BUSINESS WITH DEBT CAPITAL Debt capital is money loaned to a business that will be repaid with interest (a loan). Types of bank loans –Secured loans –Unsecured loans Types of secured loans –Line of credit –Short-term loan –Long-term loan

The business is a start up Lack of a solid business plan Lack of adequate experience Lack of confidence in the borrower Inadequate investment in the business REASONS A BANK MAY NOT LEND MONEY

SMALL BUSINESS ADMINISTRATION LOAN REQUIREMENTS Your business must be considered a small business. Your business must not be the leader in its field. Your business must comply with all federal employment laws. Your business cannot create or distribute ideas or opinions. You must have been unable to obtain financing from a commercial bank. You must invest a reasonable amount of your own money in the venture. You must provide adequate collateral.

OTHER SOURCES OF LOANS Small Business Investment Companies— SBIC Minority Enterprise Small Business Investment Companies—MESBIC Department Of Housing And Urban Development—HUD Economic Development Administration— EDA State governments Local and municipal governments

PRO-FORMA FINANCIAL STATEMENTS Projected (educated guess) of income and expenses for 1 st year Usually prepare 1 for every 3 months

Costs/Expenses –Furniture—Desks, Chairs, etc –Equipment—computers, telephones, fax/copy machine –Vehicles—delivery –Attorney/Accounting Fees –Licensing Fees Start-up Costs— Costs that occur one time when starting business

What you sold (revenues) MINUS What you spent (expenses) =Net Income or Loss Income Statement

CASH FLOW STATEMENT What money physically comes in (revenues) MINUS What money physically goes out (expenses) =Cash Flow

–Often you sell and will be paid later so you didn’t have money actually coming in, however, you did sell something—Shows on Income Statement but not Cash Flow Statement –The same is true of expenses; you may purchase something with an agreement to be billed and pay later so no money actually went out, but you did purchase something—Shows on Income Statement but not Cash Flow Statement –Credit Card Sales? Difference Between Income Statement and Cash Flow Statement:

Costs/Expenses –P–Producing/Purchasing inventory (Cost of Goods Sold) Operating Expenses— Costs that occur monthly

What is Cost of Goods Sold How much it costs you to buy (cost of goods/inventory) the things you sold

Costs/Expenses –P–Producing/Purchasing inventory (Cost of Goods Sold) –R–Rent –P–Phone, electric, water –S–Salaries –I–Insurance –P–Payroll taxes –S–Sales taxes Operating Expenses— Costs that occur monthly

Balance Sheet Shows what you own (assets), what you owe (liabilities), and what your company is worth (equity) Assets—Furniture, equipment, building, vehicles, accounts receivable, etc. Liabilities—Loans, accounts payable, etc. Accounting Formula A-L=E

Assets Fixed –Permanent things—Building, vehicle, equipment, furniture Current –Things that can be converted into cash immediately or used up—Cash, inventory, supplies, accounts receivable

Depreciation for Fixed Assets Amount an asset loses in value as it gets older so you can show its current worth

Accounts Receivable Means money you are entitled to receive in the near future You sell something and bill the customer who agrees to pay you in, say, 30 days You did not receive any money at the time of the sale though

Allowance for Uncollectible Accounts Contra-asset (Contra—Opposite) Why? Those customers you bill and expect to pay later; some of them are not going to pay you So Of the money you are entitled to receive, some of it you will not so this estimated amount will lower your total Accounts Receivable (the amount you will receive)

Liabilities Long term –Will take more than one year to pay off Mortgage on your building Loan for remodeling Short term –Will be paid off in one year or less Mortgage or any loan that is in its last year Accounts payable—when you buy something and pay in, say, 30 days