Obtaining Financing
Learning Resources
Topic Review
1. Sources of Financing
a. Free help—call your regional SBDC
Services
i.Small business start-ups
ii.Organizational structures
iii.Business plan development
iv.Accounting
v.Financial planning
vi.Export assistance
vii.Cost analysis
viii.Loan information assistance
ix.Marketing
x.Training programs
xi.E-commerce
b. Self financing vs. bank financing—advantages and disadvantages
Determining factors
i.Amount of capital available
1.Self: generally limited to personal savings and assets readily convertible to cash
2.bank: less limiting, greater amounts available
ii.Payback period
1.self: longer time, self-determined
2.bank: generally fixed at 5 to 7 years
iii.Interest
1.self: none (except opportunity cost)
2.bank: typically 2 to 3% over the prime lending rate
iv.Risk
1.self: totally assumed by the entrepreneur
2.bank: some risk is assumed but is traded off with interest payments
v.Credit history
1.self: not established
2.bank: established over time as funds are repaid in a timely manner
vi.Credit check, application, and collateral
1.self: not required
2.bank: always required
vii.Business plan preparation
1.self: recommended but not required
2.bank: almost always required
viii.Co-signer(s)
1.self: not an issue
2.bank: may be an issue if creditworthiness is an questionable
ix.SBA guarantee
1.self: not an issue
2.bank: may be needed if applicant has insufficient collateral
x.Reporting and accountability measures
1.self: not specifically required but may be a tax issue
2.bank: SBA has requirements for reports
xi.Privacy issues
1.self: not an issue
2.bank: some compromise, but only to the extent that bank officers have inside business knowledge
c.Understanding lending process & available money programs
a.Types of capital
i.Start-up capital
ii.Operating capital
b.Steps
i.Create the business plan
ii.Present the plan to the lender or investor
iii.A committee will consider your plan
1.is the entrepreneur a serious, competent individual who will repay the loan?
2.does the business match the lender/investor goals or area of expertise?
3.does the business fit well with the lender/investor needs?
iv.The plan may be modified by the lender or investor
c.10 things to do
i.get your business plan in shape
ii.be prepared to show how you’ll use the money
iii.check your credit
iv.choose a legal structure for your business
v.put your paperwork in order
vi.examine ratios (and compare them to industry averages)
vii.practice your presentation
viii.make your application impeccable and professional
ix.talk with other entrepreneurs
x.be patient but persistent
d. The importance of good credit
a.The entrepreneur’s credit history AS WELL AS the business plan are evaluated when loans/investments are considered
b.Elements of good credit
i.Established credit with a number of creditors
ii.Good history of staying within the terms and paying on a timely basis
iii.Keeping a healthy balance of debt to equity
c.Establishing good credit
i.Get a credit card (revolving debt)
1.never max them out
2.pay them off every month
3.don’t use more than 2
ii.get a car loan (with lien on the car as collateral)
iii.open accounts with businesses
iv.lease
v.sign a promissory note
1.example: college loan
2.can have higher interest rates
vi.get a mortgage
d.how much debt is appropriate?
i.Depends on ability to pay
ii.Do not owe more than you own
iii.Debt should be used for necessary purchases which will benefit you in the long term or are reasonable for current use; do not use debt to purchase luxury items or daily living expenses
e.Personal financial statements (assets – liabilities = equity) show true wealth
f.Credit scores
i.Factors in the score
1.Payment history
2.Amount owed
3.Length of history
4.New credit
5.Types of credit
ii.How to keep a good score
1.borrow only what you need
2.always pay on time
3.never buy if you don’t have the money
4.keep your checkbook balanced
5.make a budget and live in it
6.save, even if it is only a little
e. The process of finding money
a.Borrowing money (debt)
i.Bank loans
ii.Credit cards
iii.SBA and other government backed loans
iv.Bank lines of credit
v.Loans from personal sources
vi.Suppliers
b.Creative financing
i.Friends and family
ii.Customers
iii.Strategic partners
iv.Inventory financing
v.Equipment leasing
vi.Convertible debt
vii.bartering
c.Getting investors (equity)
i.Angel (personal investors)
ii.Venture capital
iii.Private placement
iv.IPO’s
v.Small Business Investment Companies (SBIC’s)
f. .Developing a loan package
a.Personal financial data
i.Personal financial statement (signed and dated)
ii.Copies of personal income tax returns (3 years worth)
iii.A credit report of the principals
iv.Source and amount of the owner’s cash input
v.Resume of principals
b.Business/Financial information (formal business plan)
i.Narrative section
1.statement of purpose
2.description/history of the business
3.competition
4.market strategy
5.location
6.management
7.personnel
8.application and effect of the loan
9.summary
ii.financial section
1.cash flow projection
a.year one is done on monthly basis
b.years two and three are quarterly
c.often the first place a lender will look in the business plan
2.income statement
3.balance sheet
4.collateral requirements
a.real estate
b.bank accounts
c.stock
5.other requirements
a.contracts
b.purchase offer, change of ownership/business acquisition
c.real estate acquisition
d.hazardous waste assessment report
g. Government lending programs
a.SBA (small business administration)
i.Basic 7(a) Loan Guarantee: Offers a guarantee up to 80% of face value of loan up to $100,000 and up to 75% of face value of loan up to $1,000,000
ii.Special 7(a) Programs:
iii.7(m) Micro Loan Program:
iv.504 Certified Development Company (CDC):
v.Small Business Investment Company (SBIC) venture capital
vi.Department of Agriculture (with links)
vii.Rural Development & Agri-business Assistance Programs
viii.State Programs (with link)
ix.Local government Programs
h. Private placement and venture capital
a.Financing options
i.Angels
ii.Strategic partners
iii.Employee stock ownership plans (ESOP)
iv.Leasing
v.Bridge capital
vi.Venture Capital
vii.Private Placement
i. Where business forms can be obtained for small businesses
a.Local requirements
i.Doing Business As (DBA) business certificate for sole proprietorships and partnerships ($25)
ii.Licenses and permits (i.e. Department of Health Permits, sign permits)
b.State requirements
i.Corporations or Limited liability Partnerships must be registered with the state
ii.Authorization to collect sales tax
iii.Licenses
a. Free help—call your regional SBDC
Services
i.Small business start-ups
ii.Organizational structures
iii.Business plan development
iv.Accounting
v.Financial planning
vi.Export assistance
vii.Cost analysis
viii.Loan information assistance
ix.Marketing
x.Training programs
xi.E-commerce
b. Self financing vs. bank financing—advantages and disadvantages
Determining factors
i.Amount of capital available
1.Self: generally limited to personal savings and assets readily convertible to cash
2.bank: less limiting, greater amounts available
ii.Payback period
1.self: longer time, self-determined
2.bank: generally fixed at 5 to 7 years
iii.Interest
1.self: none (except opportunity cost)
2.bank: typically 2 to 3% over the prime lending rate
iv.Risk
1.self: totally assumed by the entrepreneur
2.bank: some risk is assumed but is traded off with interest payments
v.Credit history
1.self: not established
2.bank: established over time as funds are repaid in a timely manner
vi.Credit check, application, and collateral
1.self: not required
2.bank: always required
vii.Business plan preparation
1.self: recommended but not required
2.bank: almost always required
viii.Co-signer(s)
1.self: not an issue
2.bank: may be an issue if creditworthiness is an questionable
ix.SBA guarantee
1.self: not an issue
2.bank: may be needed if applicant has insufficient collateral
x.Reporting and accountability measures
1.self: not specifically required but may be a tax issue
2.bank: SBA has requirements for reports
xi.Privacy issues
1.self: not an issue
2.bank: some compromise, but only to the extent that bank officers have inside business knowledge
c.Understanding lending process & available money programs
a.Types of capital
i.Start-up capital
ii.Operating capital
b.Steps
i.Create the business plan
ii.Present the plan to the lender or investor
iii.A committee will consider your plan
1.is the entrepreneur a serious, competent individual who will repay the loan?
2.does the business match the lender/investor goals or area of expertise?
3.does the business fit well with the lender/investor needs?
iv.The plan may be modified by the lender or investor
c.10 things to do
i.get your business plan in shape
ii.be prepared to show how you’ll use the money
iii.check your credit
iv.choose a legal structure for your business
v.put your paperwork in order
vi.examine ratios (and compare them to industry averages)
vii.practice your presentation
viii.make your application impeccable and professional
ix.talk with other entrepreneurs
x.be patient but persistent
d. The importance of good credit
a.The entrepreneur’s credit history AS WELL AS the business plan are evaluated when loans/investments are considered
b.Elements of good credit
i.Established credit with a number of creditors
ii.Good history of staying within the terms and paying on a timely basis
iii.Keeping a healthy balance of debt to equity
c.Establishing good credit
i.Get a credit card (revolving debt)
1.never max them out
2.pay them off every month
3.don’t use more than 2
ii.get a car loan (with lien on the car as collateral)
iii.open accounts with businesses
iv.lease
v.sign a promissory note
1.example: college loan
2.can have higher interest rates
vi.get a mortgage
d.how much debt is appropriate?
i.Depends on ability to pay
ii.Do not owe more than you own
iii.Debt should be used for necessary purchases which will benefit you in the long term or are reasonable for current use; do not use debt to purchase luxury items or daily living expenses
e.Personal financial statements (assets – liabilities = equity) show true wealth
f.Credit scores
i.Factors in the score
1.Payment history
2.Amount owed
3.Length of history
4.New credit
5.Types of credit
ii.How to keep a good score
1.borrow only what you need
2.always pay on time
3.never buy if you don’t have the money
4.keep your checkbook balanced
5.make a budget and live in it
6.save, even if it is only a little
e. The process of finding money
a.Borrowing money (debt)
i.Bank loans
ii.Credit cards
iii.SBA and other government backed loans
iv.Bank lines of credit
v.Loans from personal sources
vi.Suppliers
b.Creative financing
i.Friends and family
ii.Customers
iii.Strategic partners
iv.Inventory financing
v.Equipment leasing
vi.Convertible debt
vii.bartering
c.Getting investors (equity)
i.Angel (personal investors)
ii.Venture capital
iii.Private placement
iv.IPO’s
v.Small Business Investment Companies (SBIC’s)
f. .Developing a loan package
a.Personal financial data
i.Personal financial statement (signed and dated)
ii.Copies of personal income tax returns (3 years worth)
iii.A credit report of the principals
iv.Source and amount of the owner’s cash input
v.Resume of principals
b.Business/Financial information (formal business plan)
i.Narrative section
1.statement of purpose
2.description/history of the business
3.competition
4.market strategy
5.location
6.management
7.personnel
8.application and effect of the loan
9.summary
ii.financial section
1.cash flow projection
a.year one is done on monthly basis
b.years two and three are quarterly
c.often the first place a lender will look in the business plan
2.income statement
3.balance sheet
4.collateral requirements
a.real estate
b.bank accounts
c.stock
5.other requirements
a.contracts
b.purchase offer, change of ownership/business acquisition
c.real estate acquisition
d.hazardous waste assessment report
g. Government lending programs
a.SBA (small business administration)
i.Basic 7(a) Loan Guarantee: Offers a guarantee up to 80% of face value of loan up to $100,000 and up to 75% of face value of loan up to $1,000,000
ii.Special 7(a) Programs:
iii.7(m) Micro Loan Program:
iv.504 Certified Development Company (CDC):
v.Small Business Investment Company (SBIC) venture capital
vi.Department of Agriculture (with links)
vii.Rural Development & Agri-business Assistance Programs
viii.State Programs (with link)
ix.Local government Programs
h. Private placement and venture capital
a.Financing options
i.Angels
ii.Strategic partners
iii.Employee stock ownership plans (ESOP)
iv.Leasing
v.Bridge capital
vi.Venture Capital
vii.Private Placement
i. Where business forms can be obtained for small businesses
a.Local requirements
i.Doing Business As (DBA) business certificate for sole proprietorships and partnerships ($25)
ii.Licenses and permits (i.e. Department of Health Permits, sign permits)
b.State requirements
i.Corporations or Limited liability Partnerships must be registered with the state
ii.Authorization to collect sales tax
iii.Licenses