1 / 29

Financing a Small Business

Financing a Small Business. 4.00 Explain the fundamentals of financing a small business. 4.02 Discuss sources used in financing a small business. How are you going to finance a small business?.

Download Presentation

Financing a Small Business

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.


Presentation Transcript

  1. Financing a Small Business 4.00 Explain the fundamentals of financing a small business. 4.02 Discuss sources used in financing a small business.

  2. How are you going to finance a small business? 1. Equity sources: Money or capital contributed by owners; capital sources that trade cash for some portion of ownership or equity in a business.

  3. Equity is sometimes called Risk Capital because the investor puts his/her money at risk. • Since the investor acquires ownership in the business, no repayment of money with interest is required.

  4. How are you going to finance a small business? 2. Debt sources: Money or capital that is borrowed and must be paid back with interest.

  5. Equity sources • Personal savings • Advantages: • Owner keeps all the profits • Owner’s risk of loss provides motivation to succeed. • Disadvantages: • Creates chance of loss • Causes personal sacrifice • Causes loss of return from use of savings • Carries unlimited liability

  6. Equity sources • Friends and relatives (Love Money) • Advantages: • Provides quick and easy source of funds. • Allows less formal arrangements • Imposes fewer restrictions • Disadvantages: • Creates chance of loss • Causes possible loss of return from use of savings • Carries unlimited liability

  7. Equity sources • Partners with people or with other companies having compatible goods. • Advantages: • Brings in more cash • Shares financial risks and responsibilities • Increases borrowing power • Disadvantages: • Requires giving up a portion of profits • Results in the loss of some control and ownership

  8. Equity sources • Private investors (Angels): Wealthy individuals functioning as non-professional investors who are willing to invest in local businesses for financial or emotional reasons and who sometimes prefer to remain anonymous. • Advantages: • Invest in region in which they live • Will finance start-up businesses • Disadvantages: • Not easy to locate • Must be chosen carefully and may not always be a reliable source

  9. Equity sources • Venture capitalists: Individuals or firms that invest money professionally to make money, expect a large capital gain, and look for high growth potential. • Advantages: • Provide large amounts of money • Allow owner to maintain control and operation of the business • Provide for additional assistance • Disadvantages: • Most businesses do not qualify • Entrepreneur must give up part of ownership • Small businesses may have trouble attracting venture capitalists.

  10. Equity sources • State-sponsored venture capital funds: Funds provided to entrepreneurs by the state in an effort to encourage economic development and creation of jobs. • Advantages: • Create Jobs • Do not focus solely on profits • No Disadvantages!

  11. Debt Financing • Advantages: • Relatively easy and quick to obtain • Maintain control and ownership of the business • Repay at a more advantageous time • Tax deduction for interest and related costs • Disadvantages: • Higher interest rates • Risk of insufficient profit to cover repayment • Easy to abuse and overuse • Restrictions and limitations imposed by the lender

  12. Debt Financing • Sources: • Banks • Most common source of business financing • A line of credit that allows the businesses to borrow a stated amount of money at a stated interest rate to use as the business chooses. • Require that money be paid back on a regular basis according to the repayment plan specified. • Very conservative and not inclined to lend to businesses that are not well established. • Usually require some kind of collateral.

  13. Debt Financing • Trade Credit through Venders • Short-term financing • Credit from within the industry or trade • Finance companies • Take more risks than banks • Are more expensive than banks • Will ask for some form of security like the entrepreneur’s home, accounts receivable, or business inventories.

  14. Debt Financing • Credit Unions: Cooperatives formed by labor unions or employees for the benefit of the members. • Personal loan from a family member or friend: • Terms of the repayment may be quite flexible. • Interest rate may be low or the loan might be interest free • Mixing financial affairs with family/friend relationships may cause problems.

  15. Debt Financing • Government agencies: Operated by the government to provide technical assistance, counseling, grants, or other means of financial assistance in the form of low-interest loans. • Small Business Administration (SBA) • Uses a commercial bank to process and release the money and guarantees up to 90% of the loan if the business fails. • Also lends public funds to veterans and handicapped persons who qualify.

  16. Debt Financing • Minority Enterprise Small Business Investment Companies (MESBIC’s) • Established by the SBA • Provide funding to businesses whose ownership is at least 51% minority, female or disabled. • Small Business Investment Companies (SBIC’s) • Licensed by SBA • Provided equity and debt financing to young businesses • Invest about twice as often in start-up ventures as do venture capitalists • Privately owned • Requirements vary

  17. Debt Financing • Department of Housing and Urban Development (HUD): Provides grants to cities to lend money to private developers to help improve impoverished areas. • The Economic Development Administration (EDA) • Division of the U.S. Department of Commerce • Lends money to businesses that operate in and benefit economically distressed parts of the country • Similar to SBA, but more restricted

  18. Debt Financing • State Governments: Most states have economic development agencies and finance authorities that make or guarantee loans to small businesses. • Local and municipal governments: Sometimes make small loans of $10,000 or less.

  19. D. Process for getting a loan • Steps in getting a loan: • Select the bank carefully. • Prepare financial statements and a business plan. • Make an appointment. • Prepare to answer questions.

  20. 2. Types of loans available • Secured Loans • Short-term loans: Must be paid back within one year. • Lines of credit: Repayable over a period longer than a year. • Lines of credit: Agreement made by the bank to lend money at a stated rate of interest for whenever the owner needs it. • Unsecured Loan: a loan that is not guaranteed by collateral.

  21. Entrepreneurial characteristics needed to obtain financing • (6 C’s of Credit) • Character: The need to believe in the character of the entrepreneur and the people with whom he or she is associated, including the management team of the business. • Responsibility by showing bills paid in the past • Good credit rating • Good reputation

  22. Capacity • Evidence of the ability to repay the debt. • Legally eligible to enter into contracts.

  23. Capital • Demonstrated ability and willingness to invest personally in the business venture. • Evidence of a good financial plan with little outstanding personal debt.

  24. Collateral: Something of value that the lender can claim if the debt is not repaid.

  25. Conditions: The bank will consider all of the environmental conditions such as competition, growth, location, and economic outlook in which the business will operate.

  26. Coverage: The bank will want to know what kind of insurance coverage the entrepreneur has.

  27. F. Factors to consider when choosing a financial plan • Risk • There is a greater risk of loss with debt funds since the entrepreneur must repay the loan in accordance with the terms or risk losing the business, collateral, or even personal possessions. • There is less risk for the entrepreneur with equity funding since no repayment is required.

  28. Control • Entrepreneurs often lose control of decision-making power with the use of equity funds. • Debt funds do not involve this loss of control.

  29. Availability of Funding • The entrepreneur’s credit history or earning potential can help or might eliminate him/her from securing a debt loan. • Equity sources might not be readily available.

More Related