SMALL BUSINESS MANAGEMENT

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SMALL BUSINESS MANAGEMENT

• Chapter 7
• Financing the Small Business

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Class notes
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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?

Cottage cheese cake
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Small Business Financing

• Reasons For Financing of Ongoing Operations
• New Products and Services
• Acquisition / Joint Venture
• Expansion
• Capital expenditures
• Working capital needs

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Small Business Financing

• Other management problems affecting financing
• underestimating financial requirements
• lack of knowledge of sources of equity and debt
  capital
• lack of skills in presenting a proposal for
  financing
• failure to plan in advance for needs
• poor financial control of operations

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Determining the Amount of Funds Needed

• Start-up Costs
• Ongoing Operating Costs
• The Owners Net Worth

Capital requirements start-up costs operating
requirements owner assets available for
investment
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Determining the Amount of Funds Needed

• Start-up Costs
• Initial inventory, hiring costs, physical space
• First few months rent, payroll, advertising
• Prepaid items --utility rent deposits,
  insurance
• Licenses permits
• Ongoing Operating Costs
• Prepare cash flow statement (chapter 10)
• The Owners Net Worth

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new business is a retail establishment
promotion, you plan to give buyers 90 days to pay
Buy replacement inventory
Buy initial inventory

plan for this working capital need in advance, If
not,you probably won't even stay in business for
90 days.
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Determining Types of Financing

• Equity (Ownership) Financing
• Private Investors
• Self, bootstrapping, friends, family, private,
  employees, sale of shares
• Corporate Investors
• Venture capitalist (vulture capitalists)
• Government
• Business Development bank of Canada (BDC)
• Canada Development Corporation (CDC)
• Provincial Programs

Surviving High Tech
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Advantages of Equity Financing

• no obligations for dividends or interest
• investor expertise
• equity expands borrowing power
• equity spreads risk of failure

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Disadvantages of Equity Financing

• dilutes ownership and independence
• Disagreements
• Compromises
• legal costs

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Debt Financing

• Advantages
• Obtain higher ROI by using leverage debt
• Interest costs are tax deductible dividends from
  equity are not
• No loss of ownership control and greater
  flexibility with debt financing
• Easier to obtain than equity capital

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Financial leverage
Return on Investment ROI 10K/100K 10
Return on Investment ROI 100K/100K 100
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Debt Financing

• Disadvantages
• Interest must be paid on borrowed money
• Increased paperwork requirements and lender
  monitoring
• Total risk on part of the owner

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Sources of Debt Financing

• Private lenders
• shareholder loans
• Corporate lenders
• regular private lending institutions
• trust companies, credit unions, finance companies
• chartered banks
• Government Lenders
• May finance high debt , low 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 Applicants 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 21
• quick ratio 11
• debt-to-equity ratio
• Collateral

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Preparing A Proposal to Obtain Financing

• Criteria Used in the Loan Decision
• 3. Applicants background and creditworthiness
• personal information
• present debt 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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Avery Wine or Lotus Land

• What aspects of David Liz Averys background
  would be positive for them to obtain financing
  for their 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?

BrandMan
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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