Financing
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Financing. Definitions. ASSETS- things that are owned and have monetary value. CURRENT ASSETS – things that are owned and tend to be impermanent in value or form. Examples are cash, inventory, and prepaid expenses.

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Financing

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Financing

Financing


Definitions

Definitions

  • ASSETS- things that are owned and have monetary value.

    • CURRENT ASSETS – things that are owned and tend to be impermanent in value or form. Examples are cash, inventory, and prepaid expenses.

    • FIXED ASSETS – things that are owned and that tend to keep their value or form for long periods of time. Examples are buildings, machinery and equipment.

  • BALANCE SHEET – statement of the financial position of a business at a particular point in time.


Definitions1

Definitions

  • EXPENSES – all the money a company pays out (other than the cost of goods sold) in order to stay in business.

    • FIXED EXPENSES – expenses of a business that tend to remain constant regardless of the sales level. Examples are rent, utilities and permanent salaries.

    • VARIABLE EXPENSES - expenses of a business that tend to fluctuate with sales. Examples include supplies, packaging, and delivery expenses.

    • PREPAID EXPENSES – expenses of a business that must be paid in advance such as insurance and legal retainers. The value of the prepaid expense shows as an asset on the balance sheet and the value will go down as the value of the expense is used up.


Definitions2

Definitions

BANKRUPTCY – when a business does not have sufficient assets or earning power to repay its debts and legal action is taken to dissolve the company and compensate the creditors as much as is possible.

CREDITORS – those to whom a business owes money

REVENUE – the income of a business from sales


Sources of financing

How will you finance your business?

Loans and mortgages

from banks, credit

unions and others

Credit from

suppliers

Government

assistance programs

Personal savings

Equity capital

from private

sources

Love

money

Leasing

Local professionals

and angel

investors

Friends and

neighbours

Prepare loan or grant

request package

Venture

capitalists

Employees

Sources of Financing


Debt vs equity

Debt vs. Equity

Debt Financing – when someone raises money for a business by borrowing money from another individual or another investor. The person must promise to pay back the debt’s principal with interest.

Equity Financing – when someone raises money for a business by selling common or preferred stock to individuals or other investors. The shareholders receive ownership interests in the corporation.


Debt vs equity1

Debt vs. Equity

  • Advantages of Debt Financing

    • Useful for meeting a short-term deficit in cash flow

    • Do not have to give up or share control of your business

    • The term of the debt is generally limited

    • May be acquired from a variety of lenders

    • Information needed to obtain a loan is generally straightforward and part of your business plan

    • The interest paid is tax deductible


Debt vs equity2

Debt vs. Equity

  • Disadvantages of Debt Financing

    • Can be difficult to obtain for a risky project

    • Taking on too much debt can be a burden on your cash flows

    • If the funds aren’t used properly, it may be difficult for the business to repay the loan

    • If it is a “demand” loan, it can be called by the lender at any time

    • The lender may require you to provide a personal guarantee for the loan

    • Lenders will often insist on certain restrictions being put into place


Debt vs equity cont d

Debt vs. Equity cont’d…

  • Advantages of Equity Financing

    • An appropriate investor can contribute expertise, contacts, and new business as well as money

    • Equity may be the only option to finance high-risk ventures

    • Equity can be used to fund larger projects with longer time frames


Debt vs equity cont d1

Debt vs. Equity cont’d…

  • Disadvantages of Equity Financing

    • You may have to give up some ownership and control of the business

    • There is always the danger of incompatibility and disagreement among the investors

    • It is much more difficult to terminate the relationship in disagreements occur


Major sources of funds

Major Sources of Funds

  • Personal Funds

  • “Love Money”

  • Banks and Similar Institutions

    • Operating Loans

    • Term Loans

Continued


Major sources of funds1

Major Sources of Funds

  • Federal Government

    • Canada Small Business Financing Program

    • Industrial Research Assistance Program (IRAP)

    • Program for Export Market Development (PEMD)

    • Community Futures Development Corporations (CFDC)

    • Women’s Enterprise Initiative Loan Program

    • Aboriginal Business Canada – Youth Entrepreneurship

    • Business Development Bank of Canada (BDC)

Continued


Major sources of funds2

Major Sources of Funds

  • Provincial Government Programs

  • Venture Capital and “Angel” Investors

  • Other Sources of Financing

    • Personal Credit Cards

    • Canadian Youth Business Foundation

    • Suppliers’ Inventory Buying Plans

    • Leasing vs. Buying

    • Negotiated Leasehold Improvements

    • Advance Payment from Customers


Exit strategies for private investors

Exit Strategies for Private Investors

  • Acquisition of the business by a third party

  • Sale of the investor’s interest to a third-party investor

  • Buy-back agreement

  • Management or employee buyout (ESOP)

  • Debt repayment

  • An initial public offering (IPO)


Getting the best from your banker

Getting the Best From Your Banker

  • Know what your banker is looking for

  • Don’t “tell” your banker, “show” him

  • Interview your banker

  • Passion makes perfect

  • Ask for more money than you need

  • Get your banker involved in your business

  • Increase your credit when you don’t need it

  • Make professional introductions

  • If all else fails, keep looking…


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