11

SMALL BUSINESS MANAGEMENT

Chapter SevenChapter Seven

Financing the Small BusinessFinancing the Small Business

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Small Business Financing

Financing Ongoing OperationsFinancing Ongoing Operations– New Products and ServicesNew Products and Services– Acquisition / Joint VentureAcquisition / Joint Venture– ExpansionExpansion– Capital expendituresCapital expenditures– Working capital needsWorking capital needs

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Small Business Financing

Other management problems affecting Other management problems affecting financingfinancing– Underestimating financial requirementsUnderestimating financial requirements

– lack of knowledge of sources of equity and debt capitallack of knowledge of sources of equity and debt capital

– lack of skills in presenting a proposal for financing lack of skills in presenting a proposal for financing

– failure to plan in advance for needsfailure to plan in advance for needs

– poor financial control of operationspoor financial control of operations

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Determining the Amount of Funds Needed

Start-up CostsStart-up Costs Ongoing Operating CostsOngoing Operating Costs The Owner’s Net WorthThe Owner’s Net Worth

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Determining Types of Financing

Equity (Ownership) FinancingEquity (Ownership) Financing– Private InvestorsPrivate Investors– Corporate InvestorsCorporate Investors– GovernmentGovernment– Business Development bank of Canada (BDC)Business Development bank of Canada (BDC)– Canada Development Corporation (CDC)Canada Development Corporation (CDC)– Provincial ProgramsProvincial Programs

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Advantages of Equity Financing

no obligations for dividends or interestno obligations for dividends or interest investor expertiseinvestor expertise equity expands borrowing powerequity expands borrowing power equity spreads risk of failureequity spreads risk of failure

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Disadvantages of Equity Financing

dilutes ownership and independencedilutes ownership and independencedisagreementsdisagreementscompromisescompromiseslegal costslegal costs

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Debt Financing

Advantages of Debt FinancingAdvantages of Debt Financing

Disadvantages of Debt FinancingDisadvantages of Debt Financing

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Debt Financing

AdvantagesAdvantages– obtain higher ROI by using leverage debt.obtain higher ROI by using leverage debt.– Interest costs are tax deductible; dividends from Interest costs are tax deductible; dividends from

equity are notequity are not– No loss of ownership control with debt No loss of ownership control with debt

financingfinancing– easier to obtain than equity capitaleasier to obtain than equity capital

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Debt Financing

DisadvantagesDisadvantages– Interest must be paid and interest rates are Interest must be paid and interest rates are

higherhigher– increased paperwork requirements and lender increased paperwork requirements and lender

monitoringmonitoring– total risk on part of the ownertotal risk on part of the owner

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Sources of Debt Financing

Private lendersPrivate lenders– shareholder loansshareholder loans

Corporate lendersCorporate lenders Regular Private Lending InstitutionsRegular Private Lending Institutions

– Trust companies, credit unions, finance companiesTrust companies, credit unions, finance companies

– chartered bankschartered banks

Government LendersGovernment Lenders

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Determining Terms of Financing

TypesTypes– Short term (demand), medium term, long termShort term (demand), medium term, long term

SourcesSources– banks, private sources, factors, confirming banks, private sources, factors, confirming

houses; term lenders, leasing companies, houses; term lenders, leasing companies, foreign banks; trust companies foreign banks; trust companies

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Preparing A Proposal to Obtain

Financing Criteria Used in the Loan DecisionCriteria Used in the Loan Decision

– 1. The Applicant’s Management Ability1. The Applicant’s Management Ability How much the Applicant Knows about the BusinessHow much the Applicant Knows about the Business

How much care was taken in preparing the proposalHow much care was taken in preparing the proposal

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Preparing A Proposal to Obtain Financing

– 2. The Proposal2. The Proposal level of working capitallevel of working capital current ratiocurrent ratio quick ratioquick ratio debt-to-equity ratiodebt-to-equity ratio

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Preparing A Proposal to Obtain Financing

– 3. Applicant’s background and 3. Applicant’s background and creditworthinesscreditworthiness personal informationpersonal information present debt and past lending historypresent debt and past lending history amount of equity the applicant has investedamount of equity the applicant has invested will the applicant bank with the lenderwill the applicant bank with the lender lender relationslender relations

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Appendices

Provincial Equity ProgramsProvincial Equity Programs Federal Government Assistance Programs Federal Government Assistance Programs

for Small Businessfor Small Business Provincial Government Assistance Provincial Government Assistance

Programs for Small BusinessPrograms for Small Business Venture Capital Firms in CanadaVenture Capital Firms in Canada

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Concept Checks

1. What problems are often the result of lack of 1. What problems are often the result of lack of

management competence and experience ?management competence and experience ?

2. What are some of the operating costs involved 2. What are some of the operating costs involved

in determining the start up capital needed ?in determining the start up capital needed ?

3. Why is it important to determine the owner’s 3. Why is it important to determine the owner’s

net worth?net worth?

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Concept Checks 4. What are the sources of equity financing 4. What are the sources of equity financing

for the small business ?for the small business ? 5. What are the advantages and 5. What are the advantages and

disadvantages of equity financing ?disadvantages of equity financing ? 6. What are the advantages and 6. What are the advantages and

disadvantages of debt financing ?disadvantages of debt financing ?

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Concept Checks

7. What are the major sources of debt 7. What are the major sources of debt financing ?financing ?

8. What are the potential advantages and 8. What are the potential advantages and disadvantages of borrowing through disadvantages of borrowing through government lenders ?government lenders ?

9. What criteria do lenders use in making 9. What criteria do lenders use in making the loan decision ?the loan decision ?

2020

Concept Checks

10. What can the entrepreneur do if he/she 10. What can the entrepreneur do if he/she is unsuccessful in obtaining financing ?is unsuccessful in obtaining financing ?