SMALL BUSINESS MANAGEMENT

1. SMALL BUSINESS MANAGEMENT Chapter Seven Financing the Small Business

2. Small Business Financing • Financing Ongoing Operations • New Products and Services • Acquisition / Joint Venture • Expansion • Capital expenditures • Working capital needs

3. Small Business Financing • Other management problems affecting financing • Underestimating financial requirements • lack of knowledge of sources of equity and debt capital • lack of skills in presenting a proposal for financing • failure to plan in advance for needs • poor financial control of operations

4. Determining the Amount of Funds Needed • Start-up Costs • Ongoing Operating Costs • The Owner’s Net Worth

5. Determining Types of Financing • Equity (Ownership) Financing • Private Investors • Corporate Investors • Government • Business Development bank of Canada (BDC) • Canada Development Corporation (CDC) • Provincial Programs

6. Advantages of Equity Financing • no obligations for dividends or interest • investor expertise • equity expands borrowing power • equity spreads risk of failure

7. Disadvantages of Equity Financing • dilutes ownership and independence • disagreements • compromises • legal costs

8. Debt Financing • Advantages of Debt Financing • Disadvantages of Debt Financing

9. Debt Financing • Advantages • obtain higher ROI by using leverage debt. • Interest costs are tax deductible; dividends from equity are not • No loss of ownership control with debt financing • easier to obtain than equity capital

10. Debt Financing • Disadvantages • Interest must be paid and interest rates are higher • increased paperwork requirements and lender monitoring • total risk on part of the owner

11. Sources of Debt Financing • Private lenders • shareholder loans • Corporate lenders • Regular Private Lending Institutions • Trust companies, credit unions, finance companies • chartered banks • Government Lenders

12. Determining Terms of Financing • Types • Short term (demand), medium term, long term • Sources • banks, private sources, factors, confirming houses; term lenders, leasing companies, foreign banks; trust companies

13. Preparing A Proposal to Obtain Financing • Criteria Used in the Loan Decision • 1. The Applicant’s Management Ability • How much the Applicant Knows about the Business • How much care was taken in preparing the proposal

14. Preparing A Proposal to Obtain Financing • 2. The Proposal • level of working capital • current ratio • quick ratio • debt-to-equity ratio

15. Preparing A Proposal to Obtain Financing • 3. Applicant’s background and creditworthiness • personal information • present debt and past lending history • amount of equity the applicant has invested • will the applicant bank with the lender • lender relations

16. Appendices • Provincial Equity Programs • Federal Government Assistance Programs for Small Business • Provincial Government Assistance Programs for Small Business • Venture Capital Firms in Canada

17. Concept Checks • 1. What problems are often the result of lack of management competence and experience ? • 2. What are some of the operating costs involved in determining the start up capital needed ? • 3. Why is it important to determine the owner’s net worth?

18. Concept Checks • 4. What are the sources of equity financing for the small business ? • 5. What are the advantages and disadvantages of equity financing ? • 6. What are the advantages and disadvantages of debt financing ?

19. Concept Checks • 7. What are the major sources of debt financing ? • 8. What are the potential advantages and disadvantages of borrowing through government lenders ? • 9. What criteria do lenders use in making the loan decision ?

20. Concept Checks • 10. What can the entrepreneur do if he/she is unsuccessful in obtaining financing ?