C. Financing a Small Business 4.00 Explain the fundamentals of financing a small business Discuss sources used in financing a small business.

4.02 – How are the various sources for financing your business different? Vocabulary Objective – Students will be able to write a letter to a prospective business owner explaining the different ways he or she could finance their new business.

Consider and list If you were going to start a new business, list the different ways you could get money to finance it.

How are you going to finance a small business? Equity sources: Money or capital contributed by owners; capital sources that trade cash for some portion of ownership or equity in a business.

 Personal savings  Friends and relatives  Partners  Private investors  Venture capitalists  State-sponsored venture capital funds

How are you going to finance a small business? Debt sources: Money or capital that is borrowed and must be paid back with interest.  Banks  Trade credit through vendors  Finance companies  Credit unions  Government agencies

Write: In three sentences, explain the difference between equity sources and debt sources for financing.

Process for getting a loan Select the bank carefully. Prepare financial statements and a business plan. Make an appointment. Prepare to answer questions.

Types of loans available Secured Loans Short-term loans Lines of credit

Secured Loans For a secured loan, the borrower (debtor) gives the lender (creditor) a list of things he or she owns that she is willing to give up in the event the debtor does not pay back the loan. Example: Car loans are secured by the car purchased; mortgages are secured by the house

Unsecured Loans Unsecured loans are give based on the good faith and credit of the person applying for the loan. Example: Personal loans and credit cards

Lines of Credit Lines of Credit are a means of providing financing flexibility for the borrower. They can be secured (home equity loans) or unsecured. Rather than for one purpose only (closed loans), lines of credit money can be used by the borrower for any reason.

Write: One paragraph explaining whether a) you think taking out a loan is a good idea and why, and b) which type of loan you would think the best one for a new business owner to apply for and why.

Entrepreneurial characteristics needed to obtain financing  Character  Capacity  Capital  Collateral  Conditions

Factors to consider when choosing a financial plan Risk Control Availability

Write: If you were the president of a bank, would you give you a loan? Use the 5 C’s to explain why or why not.