© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Chapter 2 Financing the New Business

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Equity versus Financed Capital How much of your business will be equity? How much will be financed? Should you borrow funds?

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Sources of Money Small Business –an independently or privately owned and operated business that employs 100 people or fewer Loan –something furnished on condition of being returned Small Business Loan –something furnished to a privately owned business with 100 employees or fewer that must be returned

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Business-Only Loans Loan obtained without the use of personal credit –the business will have to justify the loan amount and have the ability to pay it back

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Business Loans Banks may require: –collateral –good credit –detailed financial reporting (including tax records and proposed planning for requested financing) © Milady, a part of Cengage Learning. Photography by Dino Petrocelli

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Business Cash Advances No scheduled repayment plan Will work with your business flow if you have a slow period by taking a smaller payment Will provide cash in advance, quickly, without all of the red tape and strict requirements of a business loan offered by traditional banks and other lending institutions

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Business Cash Advances Loans require: –(collateral) security –good credit –a stable business history

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Small Business Administration (SBA) Business Loans Loans given to small businesses from private- sector lenders (banks, etc.) SBA has funds for direct lending or loans to small businesses with long-term, fixed-rate financing for major fixed assets

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Secured Working Capital Loans Monetary guarantee to secure a small business loan –60 to 80 percent of your collateral –will not lend you more than 100 percent of current value

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Unsecured Working Capital Loans Loans that are not secured by any collateral –example: credit cards

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Investors Private investors –willing to lend their money to other people –private lenders receive a higher interest rate

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Franchise Start-Up Loans Because they are typically nationally known and recognized, specialized financing is available to franchises

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Lines of Credit Based on your business, not on you as an individual –based upon your existing inventory –based upon your creditworthiness with no security

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Hard-Money Equity Loans Asset-based loans –generally provided by private lenders or investment groups –borrower receives funds secured by the value of a parcel of real estate –can be provided regardless of the borrower’s credit, income, or any other circumstances, with the exception of equity

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Construction Financing Any loan where the proceeds are used to finance some kind of construction –repayment based on project completion

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Residential Equity Lines Lines of credit secured by the equity of your home

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Equipment Leasing Sale/lease-back Purchasing used

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Equipment Leasing No significant out-of-pocket expense No financing for equipment needs Tax benefits

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Equipment Sale/Lease-Back If you already have equipment, you can sell it and then lease back the equipment

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Purchasing Used Equipment Used equipment sells for 25 to 60 percent of its original value Check to be sure equipment is in good working order –repair costs and the inconvenience involved may cancel out any savings Beauty supply distributors are good sources of used equipment –guarantees integrity and can loan equipment if needed

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Purchasing Used Equipment Problems you may encounter if you purchase equipment directly from a salon and spa: –equipment not owned by the salon and spa, but was only leased, or was subject to a lien by the bank –does not include all the fixtures –sales or used tax on the purchase

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Summary Considerations: how much of the salon and spa will be equity, how much will be financed, and whether to borrow money Business-only loans, business loans, business cash advances, SBA business loans, secured working capital loans, investors, franchise start-up loans, lines of credit, hard-money equity loans, construction financing, and residential equity loans Used equipment sells for a fraction of its original value