SMALL BUSINESS FINANCING 02

http://www.hplearningcenter.com/ The entrepreneur generally has two types of financing at his or her disposal: equity and debt. When seeking capital investment dollars, it's crucial to understand your debt-to-equity ratio 5 that is, how much money you've borrowed compared with how much of your own money you've invested in the business (the higher the equity, the easier it typically is for owners to acquire financing).
10 Experts generally recommend debt financing if a

adapted from Yvonne Phelps the entrepreneur must be able to show that he
60 or she has a very real and personal stake in the

company that has applied for financing.

business has a high percentage of equity to debt. If the opposite is the case, however, then experts usually recommend increasing the ownership capital in the firm as a source of extra funds.

Although banks are usually hesitant to lend to smaller companies, the SBA has provided incentives to these institutions to provide much65 needed financing by guaranteeing loans. This program reduces the risk to banks of nonpayment, thus encouraging banks to be more willing to funnel investment dollars to the small business owner.
70 Personal finances can take a beating from

15 Venture capitalists are the most common source

of equity funding. Other sources include friends and relatives, employees, customers and industry peers. Smaller companies typically rely on a limited
20 form of equity financing. Venture capitalists are

starting up a new company. Getting your personal finances in order by creating a monthly budget and checking your credit score, for example can help ease the way toward 75 successfully obtaining start-up business financing. The start-up entrepreneur is well served by asking a few important questions: Where will my money come from while 80 I'm starting the business? Can I depend on my savings or will I need outside financial support such as a new business loan? What can I afford to go without if I have to invest a portion of my personal finances 85 into the new business? Where will I find health, auto, life insurance and other benefits? Understanding how to control your finances is a crucial first step in launching a new business. If 90 you presently have a job, then you can look forward to that income. However, you must also factor in expenses, such as a mortgage, utility bills and car payments. There are also unanticipated expenditures (an unexpected 95 hospital visit, for example), and, of course, the items you just have to have (like that new flatscreen TV). There is nothing wrong with having these expenses, but an entrepreneur should be willing 100 to devise a savings plan that will protect his or her family in case the new business makes no profit for some time (a likely scenario). This lesson examines how the small business owner prepares for start-up financing, such as 105 drafting a budget, estimating start-up costs and scrutinizing credit. Several months can go by before a start-up might see a dime of profit. That makes drafting a budget doubly important when preparing to 110 launch and finance a new business. A monthly budget is a helpful device for tracking your income and household expenses. Any strain on a personal budget can adversely impact your business' ability to succeed.

a key source of equity funding they usually come in the form of wealthy financial experts looking to invest in start-ups or three- to fiveyear-old companies with high growth and 25 competitive potential. In addition, equity can come from other investors such as family and friends, Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies 30 (MESBIs). A number of internationally recognized firms computer makers, shoe manufacturers and shipping conglomerates among them have benefited from SBIC funding.
35 Banks, savings and loans, commercial finance

firms, and the Small Business Administration (SBA) comprise the most commonly used forms of debt financing. Small businesses have enjoyed a growing
40 number of debt financing options in recent years.

State and municipal government institutions have recognized the positive effects that small business growth can have on the economy. Such institutions have worked hard to provide growth 45 opportunities such as debt financing to these growing businesses. In addition to commercial institutions, friends, family and business associates can be good sources of debt financing, particularly if your 50 financing requirements are relatively small. For the most part, however, banks are the major source of debt financing, which can come in the form of demand loans, seasonal credit lines and single-purpose loans (for such things as 55 equipment). Banks typically require some form of guarantee from the borrower, since the risk of default is a major consideration. The borrower in this case,

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SMALL BUSINESS FINANCING 02

adapted from Yvonne Phelps QUESTIONS TO ANSWER IN CLASS: 1) What benefits are not covered for students, why?
160 2)

budget can ensure that resources are in place to survive while launching a new business. Budgeting is an important first step any entrepreneur should take when considering start120 up capital. Once your household income and costs are clear, then you can begin estimating the potential costs of your new business. Another step is to estimate the potential costs of your business for at least the next several 125 months. Every business has specific monetary needs at different stages of development. Some may require only a thin budget; others might need a heavy investment in cash and equipment.
130 Identifying all expenses during your start-up 170

What financing options do students have; and their advantages and disadvantages?

3) What fixed and variable expenses does a student or a school have?

4) Does it matter if a students (or schools or citys) finances are in order, why? 5) How long does it take a student (a school) to see a profit from their enterprise? 6) Write three questions of your own for others to answer in class: A. ________________________________ ________________________________ ________________________________

period is key. These might include the fee for incorporating or the price of signage that's used on your facility. There are also ongoing expenses, such as utility costs and insurance. The 135 point to identifying these costs is to decide whether they are critical or optional. An effective start-up budget accounts for only the things the business needs most. Essential expenses usually come in two 140 categories: fixed and variable. Rent, utilities, insurance and administrative costs fall under the fixed category. Inventory, shipping and commissions are among the costs that fall under variable expenses. Using a worksheet that 145 includes all varieties of costs is the most effective way to calculate potential costs. Starting-costs calculators can easily be found online and help you account for such items as initial expenses (legal costs, stationery), bank 150 reserves, start-up inventory, additional assets (leasehold improvements, signage) and longterm assets (land, equipment).

175

B. ________________________________ ________________________________
180

C. ________________________________ ________________________________ ________________________________

185

7) List words you didnt know and their meaning:

http://www.hp.com/go/learningcenter

A. ___________________ ____________
190

________________________________ ________________________________ B. ___________________ ____________

195

________________________________ ________________________________ C. ___________________ ____________

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SMALL BUSINESS FINANCING 02

adapted from Yvonne Phelps

________________________________ ________________________________
245 205

________________________________ ________________________________ 10) Write two (2) more Multiple Choice statements based on the article: Equity financing comes from: A. SBA.
250 B. banks.

________________________________ D. ___________________ ____________ ________________________________

210

C. SBIC. D. flatscreen TVs. ________________________________

________________________________ ________________________________
215 8)

List phrases where you dont know the meaning although you know the words: ________________________________

________________________________ ________________________________
260 A. ___________________

220

________________________________ ________________________________ ________________________________ ________________________________

B. ___________________ C. ___________________ D. ___________________

225

________________________________ ________________________________ ________________________________ 9) Write two (2) more True statements based on the article: T/F Conservative entrepreneurs money from the state. / False refuse
270

________________________________ A. ___________________ B. ___________________ C. ___________________

230

T/F
235

________________________________ ________________________________ ________________________________

275 D. ___________________

240 T / F

________________________________

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