CHAPTER 10: FINANCING AND PRODUCING GOODS

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Section 1: Investing in the Free Enterprise System Entrepreneurs are often looking for

financial backers who are willing to take a chance on their small business. People who make a living off taking risks by investing in startups are known as venture capitalists.

Turning Savings into Investments Financing business expansion You put your money in the bank to make

interest the bank lends money to businesses for expansion the businesses buy property and equipment, and hire workers the businesses pay interest to the bank for the loan the bank pays you interest

Before You Pursue Financing

Cost-benefit analysis- A financial process in which a business estimates the cost of any action and compares it with the benefits of that action Estimate cost of business expansion Calculate expected revenues Calculate expected profits Calculate cost of interest on loan If the profits are greater than the cost of the loan

plus interest (long-term), then the loan is worth it If the loan is going to cost you $20,000, but you can expect to make an additional $25,000, then it is worth it. Of course, nothing is guaranteed

Investment Financing

It is a competitive market, and financial institutions can pick and choose what businesses to give financing to, so in order to get financing, a business must appear professional, have all its previous debts paid, and appear reliable and trustworty

Section 2: Types of Financing for Business Operations

Three Kinds of Financing

Based on length of time of repayment the longer it takes to repay, the more you will pay in interest

Short-term financing- for seasonal or monthly expenses

Intermediate-term financing- borrowing for land, equipment, etc; term of 1-10 years

Long-term financing- issuing stocks or selling bonds; used for major business expansion; will take longer than 10 years to see a profit

Types of Financing

Short-term Intermediate

Long-termstocks bonds

loans

leasing

Trade credit

Line of credit

loans

Choosing the Right Financing You must consider several factors when

deciding on how to raise capital for expansion Interest costs- if interest rates are high, loans

are expensive, and selling bonds requires a high interest payout, so selling stock might be the right option

Financial condition of the company Market climate- recession might mean delay of

expansion Control of the company- selling stocks means

giving up some control