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Alternate Home Mortgage Financing Methods

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					Lesson 13-Financing the Business
           “If you don't embrace your
           past, you will have no                Introduction: Consider the
           future...Only the journey is          possibility that I want to borrow
           written, not the destination."        $50,000 from you. What would
                                    --           you want to know about me and
           ArdethBey in "The                     what I intend to use it for?
           Mummy Returns"


       Objectives:
                   Explain the expectations commonly held by small business lenders,
       and identify several methods a small business person can acquire capital.
                   Formulate a financial strategy for a business venture, based on
       projected needs and current financial resources.
     Lecture Point One:

T         here are two general sources for capital to start your business: debt financing and equity

financing. Debt financing refers to borrowed funds that must be repaid, with interest, usually
on a regular payment schedule. Equity financing is capital acquired either from your own
personal funds, a partner’s contribution, or investors in the business.

In any case, the outside individual that is either lending or investing into your enterprise will
usually want to examine the quality of your business to determine whether or not it is a prudent
investment. For example, most financial institutions will want to examine a business plan that
is heavily fortified with financial reports that support a substantial investment. Generally, they
will expect that the business has had a positive cash flow for two to three years under your
management.
                                  Generally speaking, there are five C’s of credit:
                                  1. Credit quality (don’t try to hide problems, bankers don’t
                                     like surprises.
                                  2. Collateral (the value of tangible assets and receivables)
                                  3. Capacity (cash flow, ability to cover monthly obligations)
                                  4. Capital (net worth of the business—and you personally)
                                  5. Condition of industry/market (the potential market quality,
                                     and how well you understand it and the competition)
Y          our quest for financing can lead you to a variety of sources—from your own



                                   management
Savings, a partner, silent investors, and venture capitalists for equity financing,
or from financial institutions, or relatives for debt financing. If you are a start-up venture, it
is difficult to acquire institutional financing—usually a two to three year track-record is needed.
New owners should seriously explore non-traditional sources like relatives or multiple credit
card cash advances.

For those owners seeking more traditional sources, three factors are most important for their
evaluation of your potential—management, cash flow, and collateral. Management is the most
difficult for a lender to evaluate. But, the owner’s ability to amass the needed resources and


    cash flow
apply them effectively is critical to the business success. You are the one the business depends
upon for its ultimate success or failure.

The financial health of the business is most effectively represented by the
cash flow. Positive cash flow demonstrates the consistent application of
good management to generate sufficient cash to pay, in a timely manner,
a future stream of loan payments (along with all other obligations). The
final factor, also financial, is the existence of sufficient collateral to assure
repayment of a loan—ifit becomes evident that cash flow is lagging. Keep




                              collateral
in mind, the banker does not want to acquire the business.

The business borrower makes the effort, through the business plan, to demonstrate the quality of
his/her management skills, and provide financial data that will indicate adequate cash flow to assure
timely repayment, and offers reasonable collateral to secure the transaction.
Study Quiz 13. guides you through many aspects of the financing process.
F        inancing Business Start-ups is an incredible challenge. So, many start-ups

must resort to unconventional sources of start-up capital. Here are a few that could get
you past the starting line:

1. Credit cards (check Money Magazine for lowest bank card rates.
2. Friends and Relatives (they know your character – banks don’t)
3. Life insurance reserves and savings accounts
4. SBA Micro-loan Program:
       Chicanos Por La Causa—Phoenix
       501 W. Apache Street
       Phoenix, AZ 85003
       (602) 252-0482
                   up to 15,000 (without proof of bank denial)
                   $100 up-front fee
                   minimal business plan preparation
                   http://www.cplc.org
                   youth loan program (18-25 years old) $5,000 loan fund
5. Self-employment Loan Fund
       technical assistance
       $300 to $5,000 progressive increments as actions prove-out
       (602) 340-8834
6. Refinance your boat, car, or camper.
7. Take a second mortgage on your house (…a third…a fourth)
8. Research your assets (e.g. coin collections, baseball cards)
9. Look at non-bank sources: savings and loans
                               credit unions
                               insurance companies (large amts. $1M)
                              Small Business Investment Companies
N        ot only is it important to plan the initial start-up of the enterprise, the on-going

financial picture can get pretty grim if the owner doesn’t operate within the financial
capabilities of the firm. Refer to the cash flow statement often to determine if the business
is continuing to progress according to the original plan. If variances occur, react quickly to
determine appropriate actions to take. This is easily done by having a cash flow statement
that has two columns for each month in the projection—one for the estimate (done before
the year begins) and one for the actual cash receipts and expenditures. Then, pay attention
to the variances as they occur—and make adjustments where needed.

                                                             If you determine that your estimates
                                                             are on-target, you can predict with a
                                                             fair degree of accuracy if and when
                                                             you would need to acquire a credit
                                                             line loan. For example, if your
                                                             predicted cash flow that you
                                                             developed in January indicates a
                                                             three-month slow period during
                                                             June, July and August. Your banker
                                                             will be more likely to listen to your
                                                             request early in the year more than
                                                             he/she would if you came to the
                                                             bank in July in a desperate attempt
                                                             to get current with past-due
                                                             accounts.
C      learly, the financial health of your business is critical--based on the premise that the

business is in existence to make money for the owner. Aside from the initial acquisition of
funds for the enterprise, close attention to prudent management of financial aspects should be
a high priority. Here is a checklist of financial tips for ongoing operation. Work as many of them
into your routine as possible. You will reap the rewards.




     Lecture Point Two:

One final note before you get to the last project prior to the comprehensive business plan—
thinking comprehensively about your business and probably more important than the investor’s
evaluation of your business, is your customers’ evaluation. Your customer evaluates every
aspect of your business and decides if it is worth their patronage. It is this continued patronage
and the word-of-mouth promotion that will make your business financially solvent. So, I’ve
included a series of items that focus on how customers evaluate quality. I’ve come up with a list
of ten. For your specific business, there may be others. You should identify all of them, review
them on a regular basis (you will need the reminders), and apply them every day.
How do customers evaluate Quality?

   Tangibles        Physical facilities, equipment, personnel (appearances) & communication materials

   Reliability      Performance as promised, dependable & accurate

   Responsiveness   Willing to help & prompt

  Competence        Requires skills to accomplish needed tasks & provide information

  Courtesy          Polite, respectful, considerate & friendly

  Credibility       Trustworthy, believable & honest

  Security          No risk, no doubt, & no danger perceived with the business setting

  Access            Easy to contact & approachable (not intimidating)

  Communication     Listening to customers & use of clear language when speaking


  Understanding     Make the effort to know customer needs & sensitive
             Financial Tips for Ongoing Operation

1.    Get your customers to give you cash deposits when they place their orders.
2.    Persuade your vendors to give you trade credit or dating and more time to pay.
3.    Lease your equipment.
4.    Run a lean operation. No waste.
5.    Work out of your home.
6.    Get your business landlord to make on-site improvements and finance the cost over
              the term of the lease.
7.    Stay on top of your receivables. Be aggressive.
8.    Keep track of everything. Try to resell whatever waste or by-products you have in
              your particular business.
9.    Return goods that aren’t selling.
10.   Take markdowns quickly on dead goods.
11.   Use as little commercial space as you can.
12.   If your customers do not visit your business facility, it does not have to be attractive   or
      highly visible.
13.   When you have to borrow money, shop around.
14.   Make sure your liquid cash is earning interest.
15.   Shop non-bank lenders—like commercial credit firms.
16.   Do not collateralize your loans—unless you have no choice.
17.   Survey your friends and relatives—they may lend you money at a higher rate than
              they can normally get, and it will be a lower rate than you would pay.
18.   Look into R & D partnerships for product development money.
19.   Befriend a venture capitalist who funds your type of business venture.
20.   Consider selling limited partnerships. You become the general partner with little
      or none of your capital invested.
T         he Financial Plan that is your project for this lesson will be a bit different. Your efforts will

yield a narrative that will be the finished product for the financial portion of your business plan.
While your other projects were set as responses to questions, in order to develop data to be
used in the various portions of your plan, this project will be written in its final form.

I have included a sample financial plan for you to get the idea of the writing style to be used. Please
notice that the writing is in third person. You will write this portion, as well as the entire plan, as though
you are looking at the business from outside and reporting on its effectiveness as an outsider.

So, in that vein, instead of referring to my business, you should use the business name and refer to it
as XXX Business. It will be difficult to do this, and I suggest that you, in a final proofreading pass, just
check for the use of ―I‖, ―we‖, ―our‖, ―my‖, etc. and eliminate those words in favor of third person
descriptors.
                                                              Postscript on Alternate Financing
                                                          Over $1 billion in federal research and
                                                          development funds is available under the
                                                          federal Small Business Innovation Research
                                                          (SBIR) program. The money is available as
                                                          awards to firms with500 or fewer employees
                                                          for research and development and product
                                                          commercialization. This is done on a
                                                          competitive basis, with $50,000 provided at
                                                          each stage: development, prototype, and
                                                          market-ready. The program requires the use
                                                          of an expert partner (e.g. college professor) in
                                                          the process being developed.
                                          Financial Plan

Current Funding Requirements:

The start-up requirements to establish Imaginary Widgets is minimal. The fixed capital costs for the
business will require $21,000 for a van, $5,000 for fixtures and furniture, $23,000 for technical
devices/fixtures, and $3,500 for office equipment (computer, software, printer and scanner). Working
capital needs will be $1,500 for initial advertising and business apparel, $500 for contractor’s license, and
$5,000 reserve cash. The start-up capital requirements total $59,500 (see Appendix E, Start-up Capital
Worksheet).

The owner’s equity contribution will be $24,500; drawn from accumulated personal savings. Remaining
funds will be acquired through loans to the business from two relatives of the owner--$25,000 from John,
and $5,000 each from Sally and Sam. The lending agreement calls for total interest and principle
payments of $500 per month at an 11% interest rate.

Since expected return on investment (ROI) for the business is projected to be 17%, the loans will
contribute to business profitability because they allow the acquisition of needed equipment and fixtures at
an interest rate that provides 6% leverage on the borrowed funds (see Appendix G, Income Statement).

The projected business cycle identifies three slow months during the first year (June, July and August)
where cash flow will be negative. The owner will seek a line of credit with Bank Six to cover an expected
shortfall of $4,300. The line of credit can be repaid with six monthly payments of approximately $750. (see
Appendix F, Cash Flow Projection).

Long-range Financial Strategies:

Because the demand for Imaginary Widgets product and service line is expected to grow at a 10% per year
rate for the next five years, anticipated expansion of the business in six years will include an additional
$50,000 for equipment and fixtures. This expansion effort will come from the sale of stock subsequent to
the switch to corporate organization in order to capitalize on corporate tax rates and expanded benefit
programs.

				
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