Chapter 7 ppt-ag

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Chapter 7
Financing the Small Business
Cottage Cheesecake Industry
   What aspects of Brad Miller's background
    would be positive for him to obtain
    financing for his business? What aspects
    would be negative?
   What are the advantages and
    disadvantages of equity financing for this
   What other sources of financing might he
    have accessed?
Small Business Financing

   Reasons For Financing of Ongoing
       New Products and Services
       Acquisition / ______ Venture
       Expansion
       Capital expenditures
       Working ______ needs
Small Business Financing

   Other management problems
    affecting financing
       underestimating ______ requirements
       lack of knowledge of sources of equity and
        debt capital
       lack of skills in ______ a proposal for financing
       failure to plan in advance for needs
       poor financial ______ of operations
Determining the Amount of Funds Needed

     Start-up Costs
     Ongoing ______ Costs
     The Owner’s Net Worth
Determining the Amount of Funds Needed

     Start-up Costs
        Initial ______
        First few months rent, payroll, advertising

        Prepaid ______ --utility & rent deposits,
        Licenses & permits

     Ongoing Operating Costs
          Prepare cash ______ statement   (chapter 10)

     The Owner’s Net Worth
Determining Types of Financing

   Equity (Ownership) Financing
       Private Investors
            Self, bootstrapping, ______ , family,
             private, employees, sale of shares
       Corporate Investors
       Government
          Business Development ______ of Canada
          Canada Development Corporation (CDC)

          Provincial ______
Advantages of Equity Financing

 no obligations for dividends or interest
 investor ______

 equity expands borrowing power

 equity spreads ______ of failure
Disadvantages of Equity Financing

  F   dilutes ______ and independence
  F   disagreements
  F   compromises
  F   legal ______
Debt Financing

   Advantages
       Obtain ______ ROI by using leverage
       Interest ______ are tax deductible;
        dividends from equity are not
       No loss of ownership control and
        greater flexibility with debt financing
       Easier to ______ than equity capital
Debt Financing

   Disadvantages
       Interest must be paid on borrowed
       Increased ______ requirements and
        lender monitoring
       Total risk on ______ of the owner
Sources of Debt Financing

          Private lenders
               shareholder loans
          Corporate lenders
               regular ______ lending institutions
                   trust companies, credit unions, finance
                   chartered banks

          Government Lenders
               May finance ______ debt , ______ equity firms
               May be flexible, lower rates, counseling
               More paper work, time to process is longer, more
                monitoring & control
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
         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
                 Lending proposal document       (fig 7-10)

                 cash flow & income statement & Balance sheet ( chapters 3
                  & 10 )
                 Owners Salary & contingencies
      Preparing A Proposal to Obtain Financing

   Criteria Used in the Loan Decision
       2.The Proposal
               level of working capital
                   Current assets – current liabilities

               current ratio 2:1
               quick ratio 1:1
               debt-to-equity ratio
          Collateral
Preparing A Proposal to Obtain Financing

   Criteria Used in the Loan Decision
       3. Applicant’s background and
          personal information
          present ______ and past lending history

          amount of equity the applicant has
          will the applicant bank with the lender

   Lender Relations
     Clarks Sporting Goods
   Q 1. Estimate how much money Dave will
    need from outside sources to start his

   Q 2. Assuming Dave receives start-up
    financing from a bank, as calculated in
    question 1, will he require an operating line of
    credit during the first four months of
    operation? If so how much?

   Q 3. Should Dave pursue debt or equity
    sources of funds to get started?
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?
     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 ?
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 ?
Concept Checks

   10. What can the entrepreneur do if
    he/she is unsuccessful in obtaining
    financing ?

   Provincial Equity Capital Programs
   Federal Government Assistance
    Programs for Small Business
   Provincial Government Financial
    Assistance Programs and Agencies
    for Small Business
   Venture Capital Firms in Canada

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