1. 6-1 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.

2. 6-2 How To Obtain The Right Financing For Your Business Importance Of Proper Financing Importance Of Proper Financing Estimating Needs Estimating Needs Debt Vs. Equity Structure Debt Vs. Equity Structure Types/Sources Of Equity & Debt Types/Sources Of Equity & Debt What Lender Looks For What Lender Looks For Chapter 6

3. 6-3 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Capital Requirements Fixed Assets Working Capital Current Assets Current Assets -Current Liabilities Working Capital Working Capital PhotoLink/Getty Images

4. 6-4 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Financing Debt- Lender’s Income Does Not Vary With Business Success Equity- Stockholder’s Income Does Vary With Business Success PhotoLink/Getty Images

5. 6-5 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Cash Budgets Project Working Capital Needs Reflects When Revenue Collected Expenses Paid Considers Seasonal Revenue Fluctuations Used For Obtaining Working Capital (Line Of Credit) Loans

6. 6-6 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Equity Financing Owner’s Share Of Firm’s Assets Proprietorship/Partnership Equals Owner’s Personal Assets Corporation = Stock, 1 Share = 1 Vote CommonPreferred Investment Liquidity Depends On Market PhotoLink/Getty Images

7. 6-7 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Common Stockholders  Real Owners Of Corporation  Financial Claim Is After All Others  Right To Vote  Control Management Royalty-Free/CORBIS

8. 6-8 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Small Business Share Of Stock

9. 6-9 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Preferred Stockholders Claim To Profits Claim To Profits Before Common Stock Dividends Before Common Stock Dividends Not Legally Enforceable Not Legally Enforceable No Voting Rights No Voting Rights Fixed Par Value & Dividend Fixed Par Value & Dividend Cumulative Dividend Cumulative Dividend

10. 6-10 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Small Company Offering Registration (SCOR) Raise Up To $1 Million Raise Up To $1 Million Traded Traded AMEX AMEX OTC OTC Ryan McVay/Getty Images

11. 6-11 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Sources of Equity Financing Self Self Small Business Investment Companies (SBICs) Small Business Investment Companies (SBICs) Venture Capitalists Venture Capitalists Angel Capitalists Angel Capitalists Retained Earnings Retained Earnings Other Other Business Incubators Business Incubators Employee Stock Ownership Plans (ESOPs) Employee Stock Ownership Plans (ESOPs) Customers Customers PhotoLink/Getty Images

12. 6-12 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Steps To Improve Investor Relations  Range Of Funds Needed  Identify Investor Skills/Abilities  Find Investor With Similar Interests  Avoid “Quick Buck” Investor  Find Investor With More Assets Than Just Money PhotoLink/Getty Images

13. 6-13 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. What Investor Wants To Know  Can Investor Work With Owner?  Is Owner Flexible?  Is Owner Committed?  Criticism, Feedback, Assistance?  Definite, Fixed, Realistic Goals? Photomondo/Getty Images

14. 6-14 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Bartering Companies Swapping Items Of Equal Value Uses Business Travel Debt Collection Closing A Sale Employee Perks/Bonuses Line Of Credit Subject To Tax Artville/Getty Images

15. 6-15 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Accounting For Bartering Items Dissimilar- Gain Vs. Loss Items Dissimilar- Gain Vs. Loss Items Alike- Use Book Value Of Old Item Items Alike- Use Book Value Of Old Item Janis Christie/Getty Images

16. 6-16 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Debt Financing Comes From Lenders Comes From Lenders Must Be Repaid Must Be Repaid At Specified Interest Rate At Specified Interest Rate Within Agreed-Upon Time Span Within Agreed-Upon Time Span Legal Claim On Assets Before Stockholders Legal Claim On Assets Before Stockholders Equity = Safety Net For Lenders Equity = Safety Net For Lenders Ryan McVay/Getty Images

17. 6-17 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Debt Financing Advantages 1) Cost Of Debt Lower Than Equity 2) Interest Payments Deductible 3) Debt Funding Allows For More Capital To Be Raised In Addition To Equity 4) Since Debt Payment Is Fixed It Allows Owner To Keep Remaining Profits 5) Leverage Royalty-Free/CORBIS

18. 6-18 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Debt Securities Bond Bond Publicly Issued Publicly Issued Large Companies Large Companies Loan Loan Commercial Banks Commercial Banks Insurance Companies Insurance Companies Finance Companies Finance Companies Royalty-Free/CORBIS

19. 6-19 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Securities’ Maturities Short-Term- Less Than 1 Year Short-Term- Less Than 1 Year Intermediate- 1 To 5 Years Intermediate- 1 To 5 Years Long-Term- 5 Years+ Long-Term- 5 Years+ Royalty-Free/CORBIS

20. 6-20 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Bonds Standard Denomination Standard Denomination Method Of Interest Payment Method Of Interest Payment Method Of Principal Payment Method Of Principal Payment Royalty-Free/CORBIS

21. 6-21 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Loans Mortgage- Secured By Real Estate Mortgage- Secured By Real Estate Chattel Mortgage- Collateral Other Than Land, e.g., Machinery, Vehicles, Inventory Chattel Mortgage- Collateral Other Than Land, e.g., Machinery, Vehicles, Inventory Asset-Based- Secured By AR & Inventory Asset-Based- Secured By AR & Inventory Unsecured- Personal Guarantees Unsecured- Personal Guarantees Royalty-Free/CORBIS

22. 6-22 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Sources Of Debt Financing Trade Credit- Consignment Trade Credit- Consignment Commercial/Other Financial Institutions- Line Of Credit Commercial/Other Financial Institutions- Line Of Credit Credit Cards Credit Cards Insurance Companies Insurance Companies Ryan McVay/Getty Images

23. 6-23 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Suppliers Of Small Firm Credit (1998) Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

24. 6-24 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Traditional Sources Of Small Firm Credit (1998) Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

25. 6-25 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Non-Traditional Sources Of Small Firm Credit (1998) Source: Small Business Administration, http://www.sba.gov/advo/research/banking.html

26. 6-26 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Sources Of Loans

27. 6-27 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Leasing = Debt Financing Use Of Someone Else’s Property Use Of Someone Else’s Property Specified Time Period Specified Time Period Benefits Benefits Entire Payment Deductible Not Just Interest Portion Entire Payment Deductible Not Just Interest Portion Lease Equipment For Which Loan Financing Not Available Lease Equipment For Which Loan Financing Not Available Steve Cole/Getty Images

28. 6-28 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Small Business Administration Guaranteed Loans- 7(a) = 30 to 40% Of Long-Term Loans Purchase Land, Buildings, Equipment Working Capital Refinance Existing Debt Seasonal Lines Of Credit Specialize Programs SBICs U.S. Department Of Agriculture Ryan McVay/Getty Images

29. 6-29 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. SBA Required Documents Narrative Business Plan Resumes Loan Request How To Be Used List Of Assets Financial Statement- 3 Years Firm’sPersonalCollateral Royalty-Free/CORBIS

30. 6-30 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Lenders Want To Know Startup Startup Can You Live Without Income From Business? Can You Live Without Income From Business? Loan Repayment? Loan Repayment? Collateral? Collateral? Existing Existing Track Record Track Record Future Difference? Future Difference?