Financing Your BusinessChapters 19 & 20Objectives:Finding the cash you need to start your businessWeighing the pros and cons of different support

A great business idea may be the spark that gets most successful companies going, but money is the fuel that keeps it running.

Small businesses fail each year. There are a number of reasons for these failures but one of the main reasons is insufficient funds. Too many entrepreneurs try to start and operate a business without sufficient capital (money).

To avoid this dilemma you can review your situation by analyzing these three questions:

How much money do you have?

How much money will you need to start your business?

How much money will you need to stay in business?

Funding SourcesYour Own Pocket

Using your own funds has it advantages and disadvantages. You maintain 100 percent ownership and 100 percent control. The disadvantage is obviously that you assume all the risk.

In most cases entrepreneurs will need to ante up some of their own cash (as proof of their commitment).

Funding SourcesFriends & Family

Turning to friends and family for help is a time-honored tradition when starting a small business. Some people borrow money in return for a simple IOU when the company becomes profitable. Others may set up a more formal loan with interest or other arrangements. Whatever you decide, be sure all parties understand the agreement and put it in writing. Disagreements over money can spoil even the closest relationship.

Funding SourcesBank Loan

Local branches of most banks are more than willing to lend money to local businesses provided they have a solid business plan in place. The simplest agreement is a standard commercial loan. In this case, the bank loans you money and you pay it back , usually in monthly installments with interest. The risk that you will have to pay it back, even if you business runs into hard times.

Funding SourcesCommercial Line of Credit

If you don’t intend to use the money all at once, you may consider applying for a commercial line of credit. A credit line allows you to draw funds whenever you happen to need cash. Banks don’t usually require collateral to secure small lines of credit. The disadvantage to this is that this type of funding can have a higher interest rate to pay back.

What Bankers Expect

Commercial lenders like banks rely on the five Cs to determine the acceptability of a business loan applicant:

Section 19.2 Obtaining Financing and Growth Capital

C

C

C

C

C

Character

Capacity

Capitol

Collateral

Conditions

What Bankers ExpectA bank must believe in the character of the entrepreneur.

character a borrower’s reputation for fair and ethical practices, including business experience, dealings with other businesses, and reputation in the community

Section 19.2 Obtaining Financing and Growth Capital

What Bankers ExpectBanks consider the capacity of a business to pay its debts.

capacity the ability of a business to pay a loan in view of its income and obligations

Section 19.2 Obtaining Financing and Growth Capital

What Bankers ExpectBanks place a strong emphasis on whether a business has a financially stable capital structure.

capital the net worth of a business, the amount by which its assets exceed its liabilities

Section 19.2 Obtaining Financing and Growth Capital

Banks are more likely to lend to businesses with valuable collateral. collateral security in the form of assets that a company pledges to a lender

What Bankers ExpectBanks consider all the conditions in which the business operates.

conditions the circumstances at the time of the loan request, including potential for growth, amount of competition, location, form of ownership, and insurance

Section 19.2 Obtaining Financing and Growth Capital

Funding SourcesSBA Loan

The Small Business Administration is a government agency dedicated to handing out money to small businesses that may otherwise have a tough time securing financing from commercial banks. The SBA has a number of different options, the most common is the 7(a) Loan Guaranty Program, which arranges loans through private lenders which are guaranteed by SBA. You can check them out at www.sba.gov.

Funding SourcesPartners

Entrepreneurs with a great business idea but no money may seek like-minded entrepreneurs with money looking for a great idea. Many partnerships work out well, but again, it is critical to establish how much control your partners will have over business strategy, planning and day-to- day operations. A good working relationship with a business partner can help you over the inevitable bumps along the road to success.

Funding SourcesAngel Money

Pennies from heaven! Angels, in the world of finance, are wealthy individuals who agree to invest their money in a start-up business in the hopes that their bet will pay off down the road when your company makes it big. Like VC’s, they want a piece of the action, but they are less likely to interfere in the day-to-day operations of your business and they are usually more patient about getting their rewards.

What Private Investors Expect Private investors, or angels, expect:

Section 19.2 Obtaining Financing and Growth Capital

businesses they understandinvesting with like-minded investorsten times their investment at the end of five yearsa strong management team

Funding SourcesVenture Capital

Do you need more money than a bank is willing to lend you? You may want to knock on the door of a venture capitalist. When VC’s like a business concept, and are confident with the management team in place, they are willing to fork over sizeable sums. The catch: they want something back in return! Usually that is a big piece of the action and a major chunk of your company. Be cautious and understand all agreements made.

What Venture Capitalists Expect Venture capitalists rarely invest in start-up companies, but when they do, they expect:

Section 19.2 Obtaining Financing and Growth Capital

A 30 to 70 percent return on their investment for start-upsA 50 percent or more return for an early stage ventureA business with good management

Funding SourcesProspective Customers

The success of your business ultimately depends on loyal, paying customers- so why not turn to your customers upfront, asking them to ante up to help you get your business off the ground. Sound crazy? In fact, many businesses do just that. For example, you get customers willing to preorder for promised goods or services.

How to Figure Out How Money You Need If you have never had your own business before, you may have trouble guessing how much money you need in the back to start up your small business. When making your calculations, consider two kinds of spending:One-time start up costs

(Schedule of Start-up Funds Required)Regular monthly expenses

(Projected Income Statement)

How to Figure Out How Money You Need One-time start up costs

This is all the initial costs involved in getting your business up and running, including such items as rent/deposit, equipment, product inventory, business license, and your grand opening promotion (or other advertising expenses).

Regular monthly expenses

After you are open, you will need to consider what it will cost you to stay operational such as salaries, ongoing goods/supplies, rent, utilities, etc.

Refer to Mrs. Raaker’s webpage for access to this powerpoint, handouts, samples & templates.

Project 10 Creating Your Schedule of Start-up Funds Required

Project 15 Creating Your Projected Income Statement