and IG Financing Your Business by jolinmilioncherie


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                King Saud University -- Kent State University

                      Partners in Entrepreneurship

             Survey of Entrepreneurship
                      Classes 19 and 20
          Financing Your Business Workshop
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          Understand funding fundamentals,
           and how to finance the business.
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          This class will be conducted as a workshop,
          using the team’s developing business plan
                        as a ‘baseline’
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                                Financing Your Business

                             This workshop will define and examine
                                   sources of business capital.

                            Before approaching lenders, be prepared
                            to answer their questions and concerns.


Now that you understand your financial documents, and the needs you will have to start up and
run the business, you need to decide how you will finance your enterprise.

This workshop will help you to discover the sources of financing, and establish a clear plan on
obtaining the needed funds.
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                                How are Small Businesses
                         About 80 percent of small firms used some form
                           of credit in 1998 in the USA.

                         Small firms use many different sources of
                           capital, including:
                         • Their own savings,
                         • Loans from family and friends,
                         • Business loans from financial institutions.


Businesses today depend on funding to make their establishment start and grow.
Lenders will always ask you to make an investment on your own. Typically, in the United States,
this required investment would be from 10-50 %, depending on the riskiness of the business.

For example, if you were to start up a restaurant, you would probably need at least 50% of the
investment from your own funds. On the other hand, if you were taking over an already
established business that is profitable, you might only need 10% down.

If you don’t have sufficient funds, you may be able to borrow the amount from family and/or

 PROS                                               CONS
 Don’t usually have to pay it back quickly          At some time, the lender will want their money
                                                    back and you may not have the funds at the

 May not have to pay as high an interest rate       You may lose the confidence of your family
                                                    and/or friends if you don’t repay within a
                                                    reasonable amount of time.

Most likely, you will have to approach a financial institution for at least part of the loan.
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                                 How are Small Businesses
                           Credit cards, credit lines, and vehicle loans
                           are the most often type of credit.

                           Commercial banks are the leading
                           suppliers of credit, followed by owners and
                           finance companies.

                           Small Firms using Financial Services, 1998, updated 2003, SBA
                           (Percent reporting use of various types of credit)


A major source of funding these days comes from the use of credit cards. Originally, this was
only from personal credit cards, but the credit card issuers have found a ripe market in
entrepreneurships, issuing business credit cards.

While this may be helpful in the short run, especially if you find yourself short of operating
funds, the use of these cards can be habit forming. Because of extremely generous credit limits
extended, many firms find themselves deeply in debt, if they don’t pay off the loans or credit
statements, promptly.

Credit card users who miss making a monthly payment on time find that their ‘low interest
introductory interest fee’ quickly goes to 29-54% per month in interest, and not just on the one
card, but on all cards!

Credit lines can be extremely helpful, if they are used in periods of slower business activity and a
shortage of operating funds. Once again, they can be tempting and habit forming, and should be
paid back as promptly as possible.

During the downturn of 2008-2009, many firms have gone out of business because of overuse of
these credit sources, and a lowering of revenues.

Commercial banks are the number one source of credit. During the downturn, most large banks
stopped lending to small businesses, but local and regional banks continue to lend to local

Other sources of funds are other owners and finance companies and credit unions.
Borrowing from any source is known as debt financing.
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                              How are Small Businesses

                                                        Total Small
                             Credit Type
                             Any Credit                   80.0%
                             Traditional Credit Types     55.0%
                             Business Credit Cards        34.1%
                             Personal Credit Cards        46.0%


Describe and discuss the chart above.
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                                         Steps in Financing

                          Develop A                     Prepare Loan
                                          Sources of                   Present Proposal
                         Business Plan                    Proposal


Following an organized procedure will greater increase the chances of getting sufficient funding
to start and operate your business.

Of course, the process all begins with the development of a good business plan.
Once you’ve got that done, you need to investigate the sources of capital, and be sure you have
sufficient funding.


Next up is to make sure you have a well prepared loan proposal.
Finding out what the bank wants in advance will greatly increase your chances of securing the
needed funding. Then you can present your proposal.
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                                 Other Personal Financing

                            • Savings
                            • Family & Friends
                            • Credit Cards
                            • Mortgage/2nd Mortgage
                            • Home Equity Loan
                            • Life Insurance


Besides your own savings, and what you can get from family and credit cards, there are a few
more important credit sources.

Mortgages may allow you to make long term, low payment and interest loans.
In the USA, starting in 2008, home owners may secure a home equity loan to secure the loan,

One down side of these loans, is that if you fail in your business, lenders can take your house.
Another downside is that, as in the current recession, the value of your home may depreciate
greatly, meaning that the value of the home may not cover the value of the loan, and the bank
may foreclose.

Another possibility is to borrow against life insurance; that is, if it is whole life with cash value.
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                                       Equity Financing

                            • Partnership (General, Limited, Silent)
                            • Corporation
                            • Limited Liability Company
                            • Venture Capitalist


In general partnerships, the partners are jointly and severally liable for debt. Better trust your

A corporation can sell shares to gain capital.

LLC's can add members to add capital

Venture capitalists: AceNet is Small Business Administration venture capitalist network.

Venture capitalists are only interested in getting their money back at a large return, at a high rate
of interest, at a specified time.
If the payment can’t be made on time, the venture capitalist may either install their own
management in the firm, or just take over ownership.
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                               Borrowing from a Lender

                          • Financial Institutions
                                (Lenders NOT Investors)

                          • Role of the SBA
                               (Small Business Administration)

                          • Government agencies or ministries


There may also be other lending institutions, called CDCs, where you can borrow some or most
of your needed funds. These Civic Development Companies are usually funded by local or state
governments. Their funds availability is usually restricted to only certain needed funding, like
equipment, or land improvement.

Sometimes these loans can be ‘forgiven’ – not needed to be paid back – if they have been paid
back according to a specified schedule, and the business has become profitable.

The SBA (Small Business Administration) is NOT a lender. Rather, what they serve to do is
‘back up’ or secure portions of loans, made through the bank. For example, let’s say that you
need $100,000 to start up. You have $20,000 of your own funds to invest. You wish to borrow
the rest from the bank. The bank is not willing to take on that much risk. They ask you to apply
to the SBA for backing. The SBA says they will back the loan to $70,000. The banks risk is now
only $10,000, so they give you the loan. In case of your default, the SBA will repay the bank up
to the amount of the loan.

In early 2009, the SBA increased the maximum coverage to 90% - in some cases. They also
temporarily ceased charging a fee for the backing.

Government agencies and/or ministries may also be excellent sources of funding or ‘leads’ as to
where money can be borrowed.
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                                     The Loan Proposal

                           • Loan amount and exact use of funds
                           • Description of the proposed business
                           • Projected Income Statement
                           • Projected Cash Flow Statement
                           • Projected Balance Sheet


Much of this information will be included in a complete business plan.

The exact use of funds must be substantiated by written quotes for the equipment to be
purchased, remodeling or building to be completed, etc.

Any other pertinent financial information must be disclosed, for instance, money from any
investors used as start-up costs, etc.

All of the principal investors of a business must provide a personal financial statement, including
the disclosure of any other business holdings.

Credit references of all the principals of a business will be checked.
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                            The Loan Proposal, continued.

                           • Other sources of funds being used in the
                           • Personal Finance Statements of owners
                           • List of Credit references
                           • List of present and past business
                           • Personal background of applicant
                           • How and when loan is to be repaid


All of the principal investors of a business must provide a personal financial statement, including
the disclosure of any other business holdings.

Credit references of all the principals of a business will be checked.
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                                    5 C’s (Credit Factors)

                              • Capital

                              • Capacity

                              • Collateral

                              • Character

                              • Conditions


Capital assures the lender that you are a stakeholder and that they are not alone in the risk. You
have a serious commitment to the success of this business. Capital along with borrowed funds
will allow the business to operate on a sound basis.

Conditions are dictated by the state of the industry and the economic climate.

Realistic financial projections will help to predict that the business will have the capacity for
repayment of the loan. Cash flows in particular will show that the cash is in the right place at the
right time.

Collateral can be both assets which are usable in the business and personal assets which remain
outside of the business. For most start-ups, including SBA guarantee loans, a personal guarantee
will be required.

Character as the ability to manage resources both business and personal is a prime consideration
of a lender. Management abilities are a large consideration.
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             Loan Package Requirements
           • Application form
           • Personal financial statement
           • Written business plan
           • Pricing strategy chart
           • Commitments from suppliers/customers
           • Three year cash projections
             with assumptions
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            Loan Package Requirements,
           • Historical Financials
             (if an existing business)
           • Past three years personal income taxes
           • Breakdown of loan uses
           • Written quotes on items to be purchased
           • List of collateral – with serial number,
             age, money
           • Insurance: quotes for start-up, proof of
             for existing business
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               Loan Package Requirements,
           • Lease or purchase agreement
           • Accountant or Attorney services & fees
           • Partnership agreement/corp. docs.
           • Licenses & permits
           • Resumes
           • References: Past employer, creditor,
           • Equity Injection
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               Loan Package Requirements,
           • Bank/Lender Commitment (USA examples)
           • Application fee: $25/$50/$100
             (include with application submission)
           • Copy of vehicle titles or deeds
             (if pledging as collateral)
           • Other
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           The workshop will continue as progressing,
                          in Class 20
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           19_and_20 Handouts

           Reference the business plan

            and the operational plan.
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                19_and_20 Homework

           19: Start preparing your business loan

           20: Finish preparing your business loan
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The instructor should ask: “What other questions or comments do you have regarding the class
material or assignments?”

Alternately, “Questions and comments can be written and given to the instructor, or slid under
the office door. Be sure the instructor’s name is on the paper, so that it gets to the correct

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