Entrepreneurship How to Start & Operate a Small Business Financing Strategy Debt or Equity Chapter 14

1. Entrepreneurship How to Start & Operate a Small BusinessFinancing StrategyDebt or Equity Chapter 14

2. “Compare debt and equity financing.” “Discuss the three basic legal business structures: sole proprietorship, partnership, and corporation.” “Choose alternative forms of financing such as micro-loans and “bootstrapping.” Calculate debt ratios and debt-to-equity ratios “Nothing will work unless you do”. Maya Angelou Key Objectives

3. Raising Capital • Raising capital (money) is described as financing; basically, the borrowing of funds to operate your business.

4. Start-Up Capital • “ Start-up capital is the one-time investment of starting a business.” • Another term for start capital is “seed money or seed funds.” • An example of seed money for a business is purchasing the equipment needed to operate your business.

5. Maintain a Reserve • A cash reserve equals at least half of your start-up costs, i.e. if $4000.00 is your start-up costs then $2000.00 would be your cash reserve. • It’s important to have reserve capital, it’s emergency funds for maintaining your business equipment or other needs/issues that may pop-up to maintain daily business operations. • Cash reserves may give you an opportunity to take advantage of other business investments

6. Payback • “Payback tells you and your investors how long it will take business to earn enough profit to cover the start-up investment. It is measured in months.” • Example: Payback= Start-Investment Net Profit per Month • Example Payback= $1,200 =3month $400

7. Financing Your Business • “Debt- To finance with debt, the entrepreneur borrows money from a person or an institution, signing a promissory note.” • A promissory note is a promise to pay back the money you borrowed; your payment includes the amount borrowed + interest.. • “Equity-To finance with equity, the entrepreneur trades a percentage of ownership for money. The investor will receive a percentage of future profits.”

8. Debt Financing: Advantages • Advantages: • No one else has involvement in your business decisions as long as loan payments are being made as agreed too. • All your profits are yours. • You know when your payments are due and amount to be paid. • You hold the key that controls your business.

9. Debt Financing: Disadvantages • Disadvantages • Failure to pay back a loan on time can have serious consequences on a small business owner: • Bankruptcy • Selling of assets • “ Companies that rely heavily on debt financing are said to be highly leveraged.” • “Leveraged means financed through debt.”

10. Basic Business Legal Structures • SoleProprietorship-owned by one person, who may also be the only employee. • Example: Someone that creates and sell their own creations (sole proprietorship). • Partnership-ownership is shared by two or more people. • Example: Two or more people that start-up a business endeavor (partnership).

11. Basic Business Legal Structures • Corporation-an entity (legal “person”) composed of stockholders, who own pieces of the company. • Example: “A clothing designer who hopes to sell her clothes to stores internationally might choose to incorporate.” • Nonprofit corporation- also called 501c-3; a corporation whose mission is to improve society in some way (nonprofit organizations). • Example: A woman who wants to provide business clothing for other women who are trying to find jobs but can’t afford the right clothes might choose a nonprofit structure. She can then accept gifts of clothing and money and use to fulfill her mission. • Cooperative- a co-op is a business owned and controlled by the customers/members who use its services. • Example: a group of DJs might form a co-op so they can purchase and share equipment and record as a group.”

12. Equity Financing • “An equity investor invests money in a business in exchange for a share of ownership.” • Advantages to equity investor: if the business is profitable the investor shares that profit. • Disadvantages to equity investor: if the business is not profitable then the investor shares in the financial loss • Advantages to business owner:with equity financing there are no loan payments (the equity investor takes a risk, receipts of profits only) • Disadvantage to business owner: possibility of maintaining majority shares of his business

13. Anita Roddick: Using Equity • Please read page 197 second topic, great story

14. Debt and Equity • “A corporation is a company owned by people who have invested in it.” • Advantages: • Issue bonds and sell stock Definition of Bonds and Stock Sale • “A bond is an interest-bearing certificate representing the corporation’s promise to pay back the bondholder the amount he or she has lent the corporation, plus interest.” • Corporation sell stock to raise equity financing. A person who buys stock then owns a percentage of the corporation.”

15. Ratios • Debt-to-equity ratio, “means that for every one dollar of debt there is one dollar of equity.” • Example:debt = debt-to-equity ratio equity This determines a company’s financial status. Does the company owe more money than its worth?

16. Table of Company Value Over “Moderate” Will Make a Business Less Valuable

17. Debt Ratio • Debt Ratio: “A debt ratio of one means that every one dollar of assets is financed by one dollar of debt and one dollar of equity.” • amount of debt = debt ratio amount of assets • Example: 0.50 = 0.50 1.00

18. Alternative Financing • Sell equity close to home • Micro-loan financing • Angel financing (for additional information about angel financing, visit: http://acenet.csusb.edu/) • Bootstrap financing • Business incubators

19. Vocabulary • Debt • Debt ratio • Debt-to-equity ratio • Equity • Financing • Promissory Note • Start-Up Capital

20. Chapter 14 Summary • “Businesses need financing to pay start-up costs.” • “Financing (raising capital) is done by using debt or equity.” • “Businesses all have some form of legal structure.” • “Businesses use various forms of financing.”

21. ACTIVITY KEEPING A CASH RESERVE Sole Proprietorship Greeting Card Making Business Objective: Student/s should be resourceful when purchasing their stock for opening their greeting cards making business i.e. cards don’t have to be in color, they can make their own cards from stock paper and not buy already made blank cards, etc. They have to purchase material to make 12 greeting cards (saving enough money back for a cash reserve account). Material: 1 box of 4x4 blank cards 1 pack of white cards stock paper 20 boxes of crayon or less depending on class size 1 box of 4x4 envelopes 1 pack of heavy duty of white copy 20 packs of I dollar bills play money Each item will be priced differently i.e.: 1blank business cash @ $1.50 each 1 sheet card stock paper @ $ 0.75 each 1 sheet heavy duty white copy paper $ 0.50 each 1 box of crayon @ $1.00 each 1 box of pencils @ $.15 each Envelope @ $ 0.25 each 20 Glue Sticks @ $ 0.10 each 20 pair of scissors @ 0.75 each Instruction: Each student will borrower $20.00 from the bank (class instructor is the banker) at an interest rate of 7.5%. In order for the banker to approve the loan the student has to calculate total amount he/she has to pay back to the bank i.e. 20.00x 7.5% = total pay back of $21.50. After the student secures his/her note they may begin to purchase material needed to start their greeting cards making business. All student’s have to keep a reserve funds from the $ 20.00 that they borrower from the bank, (teacher can’t tell students to maintain any of their money for a cash reserve account) this is something that students should learn from reading chapter 14 about the important of maintaining reserve funds for their business.

22. Source Entrepreneurship: How to Start & Operate a Small Business By Steve Mariotti with Tony Towle, 10th edition “No individual has any right to come into the world and go out of it without leaving something behind”. George Washington Carver