Business Funding Options

Options for Funding

• Bootstrapping is cutting unnecessary expenses and operating on as little cash as possible
• Ways to bootstrap include:
  • Having no employees
  • Bartering
  • Using free resources
  • Using personal assets
  • Negotiating
  • Monitoring expenditures

Start-Up Capital

• Start-up capital is cash used to start a business
• Equity financing is raising money for a business in exchange for percent of ownership, also called self-funding
• Equity is the amount of ownership a person has in a business
• Equity financing can come from personal savings, family, friends, and business partners
• Angel investors are private investors who fund promising start-ups
• Venture capitalists (VCs) are professional investors or groups who fund start-ups/expansions
• Business incubators are programs helping start-ups innovate and grow
• Crowdfunding is using small amounts of capital from many people to finance a new business venture
• Debt financing is borrowing money for business purposes
• With debt financing, the entrepreneur remains the business owner and the loan must be repaid
• Secure loans require collateral, which is an asset pledged that will be claimed by the lender if the loan is not repaid
• Unsecured loans do not require collateral
• It is possible to obtain bank and credit union loans
• Operating capital is money needed for day-to-day business operations
• A line of credit is a specific dollar amount that a business can draw against as needed
• An overdraft agreement allows a business to write checks for more than the balance of the checking account
• Peer-to-peer lending is borrowing money from investors through a website and is also known as social lending
  • It has no lending institution, potentially lower interest rates and may have upfront fees
• Trade credit involves one business granting a line of credit to another for the purchase of goods and services
• SBA-assisted loans provide funding for small businesses
• The Small Business Investment Company (SBIC) program, microloans, 7(a) loans, and the Certified Development Company (CDC)/504 loan program
• It is possible to borrow from an IRA or 401(k) interest-free for 60 days
• Loans from friends or relatives may come with lower interest rates and better repayment schedules

Start-Up Costs

• Start-up costs are initial expenses necessary to open a business
• Financial plans summarize where a business is financially and its future expectations
• Inventory is the product the business will sell
• One-time start-up costs include:
  • Rent deposit
  • Tenant improvements
  • Furniture
  • Computer, printer, and other office equipment
  • DBA license
  • Utility deposits
  • Initial inventory.
• Operating expenses keep a company in business
• Fixed expenses remain the same every month
• Variable expenses can change on a monthly basis
• Monthly Operating Expenses
  • Fixed Expenses include: Insurance, Mortgage Phone, Rent, Salary
  • Variable Expenses include: Advertising, Fees, Office supplies, Utilities, Miscellaneous
• Planning for success includes having enough start-up capital to remain in business for at least one year without making a profit
• The Rule of Two recommends expecting things to cost twice as much and take twice as long as estimated
• Project start-up and operating expenses before expenses are incurred
• Planning for success includes: budgeting capital withdrawal for personal use, pricing competitively, and accurately forecasting sales
• It is important to calculate the break-even point, which is the amount of revenue the business must generate to equal its expenses
• Profits are earned after reaching the break-even point
• Marginal benefit measures potential gains from producing more products that sell because the profit margin is higher
• Marginal cost measures potential losses from producing more products that might not sell

Business Loan Application Process

• A small business loan application requires:
  • Résumés of all owners
  • A personal financial statement
  • A business plan with pro forma income, cash flow, and balance sheet statements
  • Business and personal tax returns and bank statements
  • Collateral to secure the loan
• Lenders evaluate on the "five C's of banking":
  • Character: History of creating and repaying debt
  • Cash flow: Ability to repay the loan on time and may require a cosigner
  • Capital: Sufficient cash to operate
  • Collateral: Valuable items or property to secure the loan
  • Conditions: Economic conditions and potential for growth

Pro Forma Financial Statements

• Are based on the best estimate of future revenue and expenses
• Revenue: Earnings a business receives for products and services
• Operating revenue: generated from business operations, usually sales.
• Non-operating revenue: Generated from other sources, such as interest and investments.
• Expenses: Costs involved in operating a business.
• Sales forecasting is necessary to complete these statements
• A pro forma cash flow statement reports the anticipated flow of cash into and out of the business
  • It projects the amount of sales and expenses for the first 12 months.
  • If sales are greater than expenses, cash flow is positive
  • Can be used as a basis for budgeting.
• A pro forma income statement projects the financial progress of a business
  • Also known as pro forma profit and loss statement (P & L)
  • Two main sections are revenue and expenses.
• A pro forma balance sheet reports a business’ assets, liabilities, and owner’s equity
  • Functions as a snapshot of business’ financial position
• Assets:
  • Property or items of value owned by a business
  • Fixed assets: Items of value that may take time to sell
  • Liquid assets: Items easily turned into cash
  • Accounts receivable: Money owed to a business by customers for goods or services delivered
  • Illiquid assets: Items that cannot be sold quickly without suffering a loss
• Liabilities:
  • Business’ debts, or what it owes to others
  • Short-term liabilities: Expected to be paid within the current year
  • Accounts payable: Money the business owes suppliers for goods or services received
  • Long-term liabilities: Debts that extend beyond the current year
• Owner’s equity: Difference between business’ assets and liabilities; also known as net worth
• Accounting equation
  • assets = liabilities + owner’s equity (net worth)