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SMALL BUSINESS MANAGEMENT
Chapter 7Financing the Small Business
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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 business?
What other sources of financing might he have accessed?
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Small Business Financing
Reasons For Financing of Ongoing Operations New Products and Services Acquisition / ______ Venture Expansion Capital expenditures Working ______ needs
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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
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Determining the Amount of Funds Needed
Start-up Costs Ongoing ______ Costs The Owner’s Net Worth
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Determining the Amount of Funds Needed
Start-up Costs Initial ______ First few months rent, payroll, advertising Prepaid ______ --utility & rent deposits,
insurance Licenses & permits
Ongoing Operating Costs Prepare cash ______ statement (chapter 10)
The Owner’s Net Worth
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Determining Types of Financing
Equity (Ownership) Financing Private Investors
Self, bootstrapping, ______ , family, private, employees, sale of shares
Corporate Investors Government
Business Development ______ of Canada (BDC)
Canada Development Corporation (CDC) Provincial ______
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Advantages of Equity Financing
no obligations for dividends or interest investor ______ equity expands borrowing powerequity spreads ______ of failure
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Disadvantages of Equity Financing
dilutes ______ and independence disagreements compromises legal ______
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Debt Financing
Advantages Obtain ______ ROI by using leverage
debt 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
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Debt Financing
Disadvantages Interest must be paid on borrowed
money Increased ______ requirements and
lender monitoring Total risk on ______ of the owner
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Sources of Debt Financing
Private lenders shareholder loans
Corporate lenders regular ______ lending institutions
trust companies, credit unions, finance companies
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
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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
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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
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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
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Preparing A Proposal to Obtain Financing
Criteria Used in the Loan Decision 3. Applicant’s background and
creditworthiness personal information present ______ and past lending history amount of equity the applicant has
invested will the applicant bank with the lender
Lender Relations
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Clarks Sporting Goods
Q 1. Estimate how much money Dave will need from outside sources to start his business.
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?
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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?
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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 ?
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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 ?
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Concept Checks
10. What can the entrepreneur do if he/she is unsuccessful in obtaining financing ?
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Appendices
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