1. 0 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill

2. 1 Chapter 19 Sources of Funding What You’ll Learn  Section 19.1  Explain the role of entrepreneurs.  Differentiate between start-up costs, operating costs, and reserve funds.  Identify sources of personal and private financing.  Discuss the options available through bank funding.  Identify the factors banks consider to approve commercial loans.  Section 19.2  Describe the function of the Small Business Administration.  Identify alternative sources of funding for a business.

3. 2 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Fast Cash  Q: My family runs a small business. Recently a lot of unexpected expenses came up, and now we need $4,000 in a hurry. We just expanded our business, so we have no cash in reserves. How can we obtain the money?  A: If you have outstanding (unpaid) invoices from customers whom you have billed for your products, you can take those invoices to a bank and borrow against those receivables. If you have orders to fill but need money for supplies, you can speak to a lender about a short-term commercial loan. Go to finance07.glencoe.com to complete the Standard & Poor’sfinance07.glencoe.com Financial Focus activity. 2 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill

4. 3 Is every business owner an entrepreneur? 3 Business and Personal Finance Unit 5 Chapter 19 © 2007 Glencoe/McGraw-Hill Main Idea To start or expand a business, you must accurately estimate the amount of funding you will need. Section 19.1 Analyzing Financial Needs

5. 4 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Starting a New Business In all business operations, you will need:  Cash  Equipment  Supplies  Goods or services to sell

6. 5 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Business Entrepreneurs Entrepreneurs are highly motivated people who transform ideas for products or services into real-world business. Entrepreneurs are the backbone of the American economy. entrepreneur an individual who takes the risk of starting a new business

7. 6 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs High School Entrepreneurs It is possible for a high school student to start his or her own business. For example, Fred DeLuca, who created Subway, is one successful entrepreneur who started his business shortly after graduating from high school.

8. 7 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Funding a Business People who take on business ventures usually need far more money than they realize. It is not easy to get funding for a new building from an outside source. Banks and other financial institutions:  Are very selective about who receives loans  Expect to get a good return on their investment

9. 8 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Determining Needed Capital When you are starting a business, the first thing you must do is make a realistic estimate of how much capital you will need. Capital is the money you need to:  Establish a business.  Operate it for the first few months.  Expand the business.

10. 9 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Start-Up Costs The first goal in determining needed capital is to identify start-up costs. To analyze your costs, you should:  List everything you will require to begin to operate.  Assign an estimated cost to each item. Make sure you research and explore the industry you are entering.

11. 10 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Common Start-Up Costs Most businesses have some common start-up costs:  Inventory needed to open the business  Equipment, fixtures, and display cases  Security deposit for rented space  Advertising and promotions  Insurance  Professional fees (such as lawyers’ fees)  Remodeling costs (such as creating office space)  Legal permits and licenses  Supplies

12. 11 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Operating Costs Businesses have a number of common operating costs:  Payroll  Rent  Insurance premiums  Utility bills  Office expenses  Advertising  Delivery charges  Bank charges and other fees operating costs the ongoing expenses for operating a business

13. 12 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Reserve Fund Before starting a business, you will also have to estimate the amount of money you may need at a later date for growth. You may need this money in your reserve fund to:  Purchase merchandise or equipment.  Lease a truck.  Allow for growth.  Help you avoid having to borrow additional capital. reserve fund money that can be made available for the future expansion of a business

14. 13 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Other Reserve Fund Expenses Other expenses that you may need to consider when looking ahead and estimating a reserve fund include:  Additional equipment for increased business  Advertising and other promotional costs  Capital for any unexpected costs or decreased sales  Maintaining a positive cash flow  Expansion of facilities  Getting and keeping the right amount of inventory

15. 14 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Personal and Private Financing Getting affordable and sufficient financing is often a major problem when starting or expanding a business. However, there are many sources of funding available for businesses.

16. 15 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill LOCATION, LOCATION Besides having a great idea for a business, you must also find somewhere to operate it. What features would you look for when choosing a location for a local business?

17. 16 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Personal Financing When starting a small business, you may have to rely on your own assets to finance the start- up and operating costs. You might use:  Your personal savings  Investments such as stocks or bonds  Loans from family members and friends With these sources of capital, you may not have enough cash to get the business going.

18. 17 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Consumer Loans In order to get the funds you need, consider applying for a consumer loan. Most financial institutions require that consumer loans be secured with collateral, which:  Reduces the risk to the bank  Gives you a much better chance at getting funding  Allows you receive better interest rates

19. 18 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Home Equity Loans A home equity loan is a loan based on the difference between:  The current market value of a home  The amount still owed on the mortgage Since you will lose your home if your business fails, you should think seriously before you finance your business with a home equity loan.

20. 19 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Private Financing If you cannot get enough capital through personal financing, your next option might be private financing. This type of funding is attractive because it:  Involves little paperwork  Often requires no collateral and low, or no, interest payments The disadvantage is that it can lead to personal conflicts if you are unable to repay the loan. private financing borrowing money from family or friends

21. 20 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Bank Funding If personal and private financing are insufficient, you may have to apply for a business loan to get additional money. A few of your options are:  Commercial debt financing  Commercial loan You may want to consider local banks rather than larger banks when getting a commercial loan. commercial debt financing borrowing money from a bank or other financial institution to fund a business commercial loan a loan that finances a new or ongoing business

22. 21 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Funding from Local Banks Getting funding from local banks has both advantages and disadvantages. Advantages might include:  They are highly experienced in dealing with small businesses.  They offer a wide variety of loan plans.  They offer advice and other business services.  They are community-oriented and are interested in seeing local businesses succeed.

23. 22 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Disadvantages of Funding from Local Banks Disadvantages of receiving a loan from a local bank might include:  They are closely regulated by the government.  There is extensive paperwork, investigation, and documentation involved in the loan process.  They are conservative by nature and may reject your loan if your business appears too risky.

24. 23 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Short-Term Commercial Loans A short-term commercial loan is a business loan that is usually made for a term of one year or less. These loans are typical for small businesses and are designed to:  Help the business meet short-term financial obligations  Help with cash flow during a specific time or season

25. 24 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Long-Term Commercial Loans A long-term commercial loan is a business loan that is made for a term of one to five years. These loans are normally used by larger, established businesses that require great amounts of funding. They may use the funds for:  Expensive equipment  The relocation of facilities  The expansion of storage areas  Other major expenses

26. 25 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Lines of Credit A line of credit makes funds available for:  Unexpected costs  Routine expenses The main advantage of this type of funding is that you do not pay any interest unless you access the funds. Once you borrow an amount from the line of credit, the bank will:  Charge you interest  Expect you to repay the money in a short period of time line of credit an arrangement in which bank customers can borrow a certain amount of money from the bank immediately

27. 26 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Secured and Unsecured Loans Because banks must be conservative in their loan policies, most business loans are secured loans. Only a well-established, profitable business that has a good relationship with a bank can obtain unsecured loans. An unsecured loan is usually:  Short-term  Subject to a higher interest rate secured loan a loan that is backed by collateral unsecured loan a loan that does not require collateral from the borrower

28. 27 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Commercial Loan Applications Banks use certain standards to:  Judge a company’s financial position  Determine how much risk to accept Banks are conservative and selective as to which businesses they approve for financing.

29. 28 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs The Five C’s of Credit If you apply for a commercial loan, the bank will first examine the five C’s of credit:  Character  Capacity  Capital  Collateral  Credit history

30. 29 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill

31. 30 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill 30 Paid in Full When you get your first credit card, use it wisely. Decide how much you can afford to charge each month and stick to that budget. Be sure to pay your bill in full every month. If you do, you will avoid high interest charges and save. How would good use of personal credit cards help you in starting up a business in the future? Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill

32. 31 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.1 Analyzing Financial Needs Business Plan The bank will also examine your business plan to make sure that:  Your business is financially sound.  You have a clear vision of where you want your business to go.  You have identified the necessary steps to achieve your goals. Banks often base loan decisions on the business plan.

33. 32 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill What advantages might the federal government receive by operating the Small Business Administration (SBA)? 32 Business and Personal Finance Unit 5 Chapter 19 © 2007 Glencoe/McGraw-Hill Main Idea Entrepreneurs can get funding through the help of the Small Business Administration and other sources. Section 19.2 Sources of Funding

34. 33 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Small Business Administration The federal government recognizes the importance of small businesses in the American economy and, therefore, provides assistance to them. The Small Business Administration (SBA) has services that include:  Management training  Organizational guidance  Assistance in getting funding Small Business Administration (SBA) an independent agency of the federal government that offers assistance to people who are starting small businesses and to those who want to expand existing businesses

35. 34 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding SBA Guaranteed Loans The most common type of SBA loan is obtained through the Guaranteed Loan Program. With this kind of loan, the SBA:  Examines your application  Approves the loan  Authorizes the bank to give you the funding  Guarantees a major portion of the loan With this guarantee by the federal government, banks are more willing to grant funding to a small business.

36. 35 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding LowDoc Program In the past many people were frustrated by:  The amount of paperwork  The time it took to process loan applications through the SBA In response, the SBA introduced the LowDoc Program in 1993. LowDoc Program a government loan program that allows businesses applying for loans of less than $150,000 to submit a one- page application with a small amount of documentation

37. 36 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Other Sources of Funding You can also get funding through:  A business credit card  Private investors  Commercial finance companies  Venture capital firms  State and local governments

38. 37 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Business Credit Card The use of business credit cards has become a major source of short-term financing for small businesses. You can get a business credit card through:  Visa  MasterCard  American Express Business credit cards are good for emergencies, but balances should be paid as quickly as possible. business credit card a credit card that is issued to a business rather than to an individual

39. 38 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Private Investors Private investors:  Will usually leave the management of the business to the owner  Are interested in getting a good return on their money  May want a share of ownership If you cannot locate private investors in your area, the SBA may be able to help. private investor a person outside an entrepreneur’s circle of friends and relatives who provides funding because he or she is interested in helping a new business to succeed

40. 39 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Commercial Finance Companies Commercial finance companies insist that all loans be secured with collateral, such as:  Equipment  Inventory These companies are helpful to existing businesses that need short-term financing. commercial finance company a firm that lends money only to businesses

41. 40 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Venture Capital Firms Venture capital firms will lend money to high-risk small businesses but often expect a large return of 25 to 40 percent on their investment. Since venture capital firms are investing in your business, they will:  Expect to have a voice in major business decisions  Examine a business’s financial position carefully throughout the year venture capital firm a company that provides private funding for small businesses that need a substantial amount of immediate cash

42. 41 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Small Business Investment Companies Most venture capital firms are private, but the SBA created a public venture capital program called the Small Business Investment Company Program. The advantages in dealing with the SBIC program are that:  The SBA regulates lenders.  Financing terms must meet SBA guidelines. Small Business Investment Companies (SBICs) private investment firms that work with the SBA to provide longer- term funding for small businesses

43. 42 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding State and Local Funding Many states provide opportunities for small businesses to get funding through a variety of programs. These funding programs are available in cities where local and state governments are encouraging individuals to open businesses in economically depressed neighborhoods.

44. 43 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Section 19.2 Sources of Funding Funding Your Dreams The American economy has been built by entrepreneurs who were willing to:  Take risks  Explore new ventures The funding of small businesses is essential to the American economy.

45. 44 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Key Term Review  entrepreneur  operating costs  reserve fund  private financing  commercial debt financing  commercial loan  line of credit  secured loan  unsecured loan  Small Business Administration (SBA)  LowDoc Program  business credit card  private investor  commercial finance company  venture capital firm  Small Business Investment Companies (SBICs)

46. 45 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 1.Explain why entrepreneurs are considered part of the backbone of the American economy. Entrepreneurs are highly motivated people who transform ideas for products or services into real-world business. Almost all of the nation’s Fortune 500 companies started as small businesses.

47. 46 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 2.Identify some differences between start-up costs, operating costs, and reserve funds. Start-up costs include money for the purchase of assets needed to run a business. Operating capital is the money needed to operate a business for the first few years. Reserve capital is money set aside for unexpected costs or opportunities.

48. 47 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 3.Explain the pros and cons of taking out a home equity loan to start a business. Home equity loans are:  Fairly safe for financial institutions because they are secured by property  Easier to get than consumer loans You may lose your home if your business fails and you are unable to repay your loan.

49. 48 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 4.List one advantage and one disadvantage of secured loans, unsecured loans, and lines of credit. A secured loan is a loan that is backed by collateral. An unsecured loan is a loan that does not require collateral from the borrower. A line of credit is an arrangement in which bank customers can borrow a certain amount of money from the bank immediately. The main advantage of this type of funding is that you do not pay any interest unless you access the funds.

50. 49 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 5.Describe the five C’s of credit and how they apply to a business loan. If you apply for a commercial loan, the bank will first examine the five C’s of credit:  Character  Capacity  Capital  Collateral  Credit history

51. 50 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 6.List one reason that loans guaranteed by the Small Business Administration are a win-win situation for the entrepreneur and the lending institution. The federal government recognizes the importance of small businesses in the American economy and, therefore, provides assistance to them.

52. 51 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Chapter 19 Sources of Funding Reviewing Key Concepts 7.Explain the role of a venture capital firm. Since venture capital firms are investing in your business, they will:  Expect to have a voice in major business decisions.  Examine a business’s financial position carefully throughout the year.

53. 52 Business and Personal Finance Unit 6 Chapter 19 © 2007 Glencoe/McGraw-Hill Newsclip: Finding Capital To be your own boss, you need to find capital for starting up your business. There are more options available to entrepreneurs today than in the past. Log On Go to finance07.glencoe.com and open Chapter 19.finance07.glencoe.com Learn about different options to help you find the funding needed to start a new business. Write a paragraph about which option you would choose and why.