Presentation on theme: "SMALL BUSINESS MANAGEMENT Chapter 7 Financing the Small Business."— Presentation transcript:
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