Financing a small business the ABC from star to fincne

Financing a Small Business

The ABC’s from Start to
Finance…
BUS 202 Financing a SB
Spring 2006
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Why Worry about Financing?
 The key to a successful business often
depends on the ability to have sound
management, financing & cash flow to fund the
operations
 Inadequate financing is one of the major
causes of business failure
 To avoid this pitfall, small business owners
need enough money and need to know how to
manage it to STAY in Business!


What Financial Resources are available
for my business?
The most common resources:

•
•
•
•
•

Personal Savings
Friends & Relatives
Venture Capital Firms
Government Loans
Commercial Loans

Knowing Who, When and Where to ask for financing
can be a key to your success!


Debt or Equity?
• DEBT

is borrowed
money…it becomes a liability on
your balance statement (long
term loan)

• EQUITY

is an “investment”
in your business (silent partner
or venture capital)
Remember the Accounting
Equation
Asset = Liabilities - Owners’ Equity


Equity vs. Debt Financing

Advantages
Debt Financing
Advantages:
• Relatively Easy & Quick
• Maintain control &
ownership
• Interest & other costs tax
deductible

Equity Financing
Advantages:
• Unsecured (not required
to pay back)
• Share of financial risk
(partners)
• Less pressure to make
monthly payments
• May be able to borrow
more


Equity vs. Debt Financing
Disadvantages
Debt Financing

Equity Financing

Disadvantages:
• Interest Costs Expensive
• Risk of profits not

covering repayment
• Easy to abuse & overuse
• Must share financial
information
• Lender Restrictions &
Limitations

Disadvantages:
• Risk of destroying
personal relationships
• Give up part of profits
• Give up part of ownership
of business
• Give up some control of
business
• Legal restrictions


Debt: A Loan by any other name
 Debt Financing is most frequently used when
there are minimal risks and the investment
return is acceptable to the lender.
 Businesses that rely on debt financing are
those in earlier stages of business
development (primary & secondary levels of business
growth).
There are two specific types of debt financing
1) Conventional Loan Programs
2) Government Guaranty Loan Programs

Needs for Capital
Capital to Open the
Store

Capital to Keep
Store Open

• Start-up costs to
cover a term loan
• Equipment
• Lease hold
improvements
• Inventory
• Working capital

• Working capital to
cover growth
expenditures
normally a “line of
credit”
• cover overhead
• payroll
• purchase inventory
• maintain cash flow


Common Uses for Financing
• Start-up Capital
• Working Capital

• Permanent Working
Capital
• Growth Capital
• Equity Transfer Capital
• Debt- refinancing (more
difficult to get a
business loan)


Conventional Bank Loans
•
•
•
•

Short-term
Demand loans
Seasonal lines of credit
Single-purpose loans for machinery and
equipment.
• Banks generally are reluctant to offer longterm loans to smaller firms.


A Guaranteed Loan?
• SBA and State Guarantee Programs
are loans made by private lenders
and guaranteed up to 85% by the
federal or state government
• The government is not a “direct”
lender, but acts as a co-signer

• This takes the risk off the lender.
Business + Lender + Loan guaranty from federal or state programs =
AN Approved Loan


What’s a Lender to Do????
Lender’s can:
• Approve your Loan
Request
• Seek a guarantee
from SBA to support
their loan to you
• Decline your
application all
together


US Small Business
Administration
The SBA guaranteed lending
program encourages banks and
non-bank lenders to make longterm loans to small firms by
reducing their risk and leveraging
the funds they have available.


SBA & State Loan Eligibility
• Independently owned &
operated; not dominate in field
• Press & real estate not eligible

• Considerations:
Business Type
Size
Use of Proceeds
Personal Net Worth
Character of Individual


SBA Loan Guarantee
Programs

• SBA 7(a) Program
• Term loans for various
purposes
• SBA will guarantee up
to 85% of the bank’s
loan
• The SBA guarantee
helps shoulder the
risk for the bank

• SBA 504 Program
• Real Estate,
Construction, LongTerm Asset purchases
• 50% Bank loan, 40%
SBA financing
through CDC, 10%
down payment

SBA 7(a) Loans
Loan Proceeds can
be used for:
• Inventory
• Equipment
• Machinery
• Start-Up Costs
• Working Capital
• Real Estate


SBA & State Guarantee Loans
Small Business Administration
•7a Loan
•Low-doc/Women & Minority Pre-qualification
•504 Loan
•SBA Micro loan
•SBA Community Express SOHO Micro Loan
State Administered Loan Programs
• Nor-CAL FDC State Guarantee
•Clean Loan Program (pollution & waste reduction)
•Safe-Bidco State Guarantee
•State Rural Loans- Agriculture & Industrial


Micro-Loans
• Normally $25,000 or under
• Unsecured!
• Can go as low as $5,000
• Used for start-up businesses

• Interest rates normally higher than
conventional loans ( 3-6%) above
prime
• Relaxed criteria
• May have qualification restrictions


Local City & Redevelopment Loans
•Local City Redevelopment Loans
•“Gap” Financing to assist businesses in
redeveloped area
•Lower interest rate and tied to job
creation
•Special “Façade” or Signage Loan
Programs
• Some local micro-enterprise loans


NOT EXACTLY!!!
• Applicant must be
“Credit Worthy”
• 5 “C’s” of Credit
• Applicant MUST be
able to demonstrate
the ability to re-pay
the loan – even with
the SBA guarantee


What the Bank and SBA Look

For in Analyzing a Loan
Application
1. ABILITY TO REPAY
2. CREDIT HISTORY
3. EQUITY INVESTMENT
4. SECONDARY SOURCE OF REPAYMENT
5. EXPERIENCE/ABILITY TO MANAGE BUSINESS
6. PERSONAL OBLIGATIONS


#1

Ability to Repay!!!

• Financial Statements
• P & L’s
• CASH FLOW –
remember, bills are
paid with CASH, not
profits!
• NEW BUSINESSES –
Bus Plan is KEY


2. Credit History
• Pull your Credit
Report BEFORE you
go to the bank!
• Mistakes take 3-6
weeks to correct

• Detailed information
explaining credit
issues


3. Equity
• MUST be enough
equity in the business
to leverage the loan
• General Rule – Debt
to Equity no higher
than 4
• Start-up Businesses –
expect 25%


4. Collateral
• Secondary Source of
Repayment
• Personal and
Business Assets that
can be sold to pay
back the loan in the
event of default
• Co-Signers can
pledge collateral