Financing Your Business

Entrepreneurial Resources

• Bootstrapping—– Operating as frugally as possible and cutting all

unnecessary expenses; “getting by”– How to use fewer resources:

• Hire as few employees as possible (greatest single business expense usually)

• Lease where possible—don’t buy.• Be creative—look for freebies, etc.

– Longer payment terms from suppliers– Require customers to pay in advance– Sell accounts receivable to factor—agent who

handles your transactions for a fee

Start-Up Money

• Personal resources– Savings– Credit cards– Family– Friends

Financing the Start-Up

• Two types of financing for new capital– Equity sources– Debt sources

Equity Sources

• Trade cash for some portion of ownership (equity) of the business

• Equity is an ownership in the business. If they give you $$, you will have to give them part ownership in your company

• AKA risk capital—investor is putting money at risk (they can either lose it or gain from it)

Sources of Equity Financing– Personal savings (#1 source)

– Friends & family

– Private investors (angels)

– Partners (individuals, strategic alliances, etc.)

– Venture capitalists (professionals)—better for growth funding rather than start-up

– State-sponsored venture capital funds – used to promote entreprenurial growth in a state.

Debt Sources

• Entrepreneur borrows money & repays it with interest—retains full ownership—loan becomes liability on balance sheet

Sources of Debt Financing

• Banks– Line of credit—bank lends you a certain

amount at a certain interest—company can borrow against it as needs dictate

• Trade credit- one business gives another (often from suppliers)

Debt sources cont’d

• MESBICs—Minority Enterprise Small Business Investment Companies—done by SBA for minorities, females, or disabled persons

• Commercial finance companies—more expensive because they often have easier credit terms than banks

Debt Sources cont’d

• Small Business Administration—SBA—third party – will guarantee the loan with a bank, but they DO NOT GIVE LOANS

• SBICs—Small Business Investment Companies—licensed through SBA—private companies