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Financing Your Business

Financing Your Business. 11. chapter. Prepared by Ron Knowles Algonquin College. Business Plan Building Block. You must get your own personal finances in order—before you start your business. Investigate the sources of informal and formal funds available and the conditions for repayment.

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Financing Your Business

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  1. Financing Your Business 11 chapter Prepared by Ron Knowles Algonquin College Chapter 11

  2. Business Plan Building Block • You must get your own personal finances in order—before you start your business. • Investigate the sources of informal and formal funds available and the conditions for repayment. • Many businesses underestimate capital needs, so your business plan must demonstrate that you have planned for all financial contingencies. Chapter 11 will help you • prepare the financial section of your business plan. 11 chapter Chapter 11

  3. Learning Opportunities • Understand that you, the owner, will be the major source of start-up capital. • Determine your credit situation. • Find out how much unsecured credit you can draw on. • Create a personal balance sheet (or statement of net worth). • Chart your personal money future—prepare a monthly budget. • Discover your risk tolerance. • Understand the inherent risks in borrowing from friends and family. • Partner with, and gain the most support possible from your banker. • Investigate the lending arena. • Identify the pros and cons of debt versus equity financing. • Determine the types of financing options best suited for your business. Chapter 11

  4. Financing for Start-ups • Most start-up business rely heavily on informal or owner-based financing like: • Personal savings and loans • Personal lines of credit • “love money” from family and friends • Start-ups are less likely to use formal types of financing such as commercial loans, commercial credit cards and leasing. Chapter 11

  5. Financing by Stage of Business Development Table 11.1 Chapter 11

  6. Your Credit History • Credit refers to the money loaned or the ability to borrow money. • A lender will need to review your credit history and will probably request a credit report. • Key factors for making a decision about your credit are—in order of importance: • How you pay your bills. • Amount of money you owe and the amount of available credit. • Length of credit history. • Mix of credit. • New credit applications. • What is your credit history? • You’ll need a copy of your credit report—it’s free from three credit • reporting agencies. (See Action Step 50.) Chapter 11

  7. Unsecured Credit • Unsecured credit is credit extended to a borrower on the promise to repay the debt with no collateral or guarantee. Chapter 11

  8. Unsecured Credit • Before you start your business you are encouraged to determine you how much unsecured credit you have and: • Check out your health and medical insurance needs. • Apply for additional credit cards or increased limits. • Apply for a personal line of credit—which will depend on the four Cs (capital, character, capacity and collateral). • Explore the possibility of a home-equity loan or home-equity line of credit. Chapter 11

  9. Develop a Personal Balance Sheet • A personal balance sheet is a list of the market value of assets (what you • own) and liabilities (what you owe) that will show your net worth. • A personal balance sheet: • will tell you where you are with money now • will indicate your borrowing capability • Creating your personal balance sheet: • get a total of your personal assets—what you own • subtract • your personal liabilities—what you owe • equals • your net worth or personal equity Chapter 11

  10. Your Personal Money Future and Risk Tolerance • Look ahead into the next year • List your expenses (Box 11.3 will help) • Will your new business be able to support your lifestyle? • Assess your risk tolerance. How much money are you willing to lose? • Do a reality check. Revisit your personal balance sheet. • Have you considered the risk tolerance of your family members? Chapter 11

  11. Informal Sources of Financing Self-Financing • This will likely be your most important and only source Family and Friends • Having a banking relationship with your parents and friends is fraught with potential problems. • Consider asking them to co-sign loans • Do not accept more money than your lender can afford to lose. • Tread lightly and carefully Chapter 11

  12. Financing From Family and Friends Consider using your own capital. If you decide to borrow from family and friends: • Do not accept more money than your lender can afford to lose • Put everything in writing • Make it a business loan • Include in the loan a provision for repayment • Discuss you company’s goals and any potential problems • Get independent advice Chapter 11

  13. Formal FinancingPrepare to Meet Your Banker • Some strategies • Make your banker part of your team • Try not to surprise your banker • Invite your banker to your business • Respect the banker’s rules • Have an up-to-date plan • Get ready for collateral, personal and spousal guarantees • Understand the banker's discretionary limits Chapter 11

  14. Angels Suppliers Customers Leasing Employees and employers Micro lending programs Government programs Venture capitalists Cooperative partnerships Formal FinancingOther Sources of Start-up Capital Chapter 11

  15. Will that be Debt or Equity? Equity financing • If you or others invest money in a business and expect, in return, a portion of ownership, this is called equity financing or ownership investment. Debt financing • If you or others lend money to a business and expect to be repaid the full amount plus interest, this is called debt financing. Chapter 11

  16. Will that be Debt or Equity? How should you finance the business: debt or equity or some combination? • The trick is to find the right balance between debt and equity—one that will satisfy the needs of • You the owner • The business • The market Chapter 11

  17. Major types of debt financing are: Shareholders loans Canada Small Business Financing (CSBF) loans Operating loans (Line of Credit) Term loans Major types of equity financing are: Sole proprietorship or partnership Owner’s personal investment Incorporated business Common shares Preferred shares Convertible debentures Types of Debt and Equity? Chapter 11

  18. Plotting Your Future Checklist • What is the total amount of equity you need to establish and operate your business for the first year? Identify all the sources of funds. • Identify your funding shortfall each month from the cash flow, and the funding sources and expected rate of interest. • Are there any government, agency, or foundation funding sources for your venture? • How much, if anything, do you expect from a venture capitalist or angel investor, and what ownership are you prepared to forego? • Who are your prime vendors? What type of purchase agreement do you have with them? • What is your debt-to-equity ratio, and how does that compare to industry ratios? Chapter 11

  19. Financing your Business, Part IICase Study This case study is about you. It will help you get ready to finance your business • What is your credit rating? • How much unsecured credit do you have? • List your current financial resources. • Chart your personal money future. • Complete a personal balance sheet or financial statement. Chapter 11

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