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Financing Your Business

Financing Your Business. Startup Costs. You need to be sure you have all expenses accounted for. Examples: Equipment and Supplies Furniture and Fixtures Vehicles Remodeling Legal and Accounting Fees Licensing Fees. Personal Financial Statement.

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Financing Your Business

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  1. Financing Your Business

  2. Startup Costs • You need to be sure you have all expenses accounted for. • Examples: • Equipment and Supplies • Furniture and Fixtures • Vehicles • Remodeling • Legal and Accounting Fees • Licensing Fees

  3. Personal Financial Statement • In order to determine if you have the resources to finance your business, begin by assessing your Net Worth (or equity). • Net Worth is the difference between what you own and what you owe (assets vs. liabilities). • To do this you should prepare a personal financial statement.

  4. Generating Capital • There are two ways to generate capital for your business • Equity financing • Debt financing • First you must calculate your debt to equity ratio. • The relation between dollars you have borrowed (debt) vs. the dollars you have invested (equity) • Total Liabilities ÷ Total Equity • A high ratio means company has been funded through debt (red flag) • Low ratio means company was financed through equity

  5. Equity Financing • Equity Capital: money invested in business in exchange for a share in the profits of the business. • Places to gain equity capital • Personal Contributions • Friends and Relatives • Venture Capitalists • Individuals or companies that make a living investing in startup companies • They look for companies who make above average profits, have a chance of making hundreds of millions within a few years, and are likely to go public • Not a solid option for small business because of above criteria.

  6. Debt Capital • Debt Capital: is money loaned to a business with understanding that money will be paid back with interest. • Friends/Relatives • Banks

  7. Bank Loans • Secured Loans: loans backed by collateral • (property that a borrower forfeits if he/she defaults on loan). • Types of loans: • Line of Credit • Long-Term Loan • Accounts Receivable Financing • Inventory Financing

  8. Be Ready • A bank may decline you for a loan for these reasons: • Business is a startup • Lack of solid business plan • Lack of experience • Lack of confidence • Inadequate personal investment

  9. Other Sources of Loans • Small Business Administration (SBA) • Small Business Investment Co. (SBIC) • Minority Enterprise SBIC’s • Department of Housing and Urban Development (HUD) • Economic Development Admin (EDA) • State Governments • Local Municipalities

  10. Pro Forma Financial Statements • The financial statements you prepare for your business plan are called pro forma financial statements and are based on projections. • They consist of: • Cash Flow Statement • Income Statement • Balance Sheet

  11. Cash Flow Statement • Definition: An accounting report that describes the way cash flows in and out of your business over a period of time • Show how much cash you have to pay bills and whether you have enough to continue operating. • Equation • Cash Receipts – Cash Disbursements = Net Cash Flow

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