Chapter 7 Chapter 7 Obtaining FinancingObtaining Financing

OOBJECTIVESBJECTIVES– estimate start-up costs for a new enterprise– identify sources of funds– describe differences between short-term and

long-term needs– identify needs for additional capital– suggest tips for requesting loans

Entrepreneur: Entrepreneur: Antonio SanchezAntonio Sanchez

• hard worker

• positive attitude

• perseverance

• integrity

Estimating Start-up CostsEstimating Start-up Costs

• Make a conservative sales estimate. – (better too low than too high)

• Make a conservative expense estimate. – (better too high than too low)

One-Time CostsOne-Time Costs• Equipment• Installations• decorating and remodeling• initial inventory• deposits for utilities• fees for accountants and lawyers• licenses & permits• advertising for “grand opening”

Continuing CostsContinuing Costs• Salaries • Advertising• Utilities• Repairs and

maintenance• Fees for

accountants and lawyers

• Rent• Supplies• Insurance• Interest on Debt• Taxes• Employee Training

Costs

Types of Funds: Types of Funds: Equity and DebtEquity and Debt

• Equity• money or capital contributed by the owners• no interest payments to make• controls business• more can be raised by selling stock• availability depends on success of enterprise• long-term

Types of Funds: Types of Funds: Equity and DebtEquity and Debt

• Debt• money or capital that is borrowed• interest payments must be made• failure to make loan payments can bankrupt a

company• lenders are not usually actively involved in running

the company – little control• availability depends on economy, enterprise • short-term

Current AssetsCurrent Assets• Cash

• Inventory

• Accounts receivable

Fixed AssetsFixed Assets• Building

• Land

• Vehicles

Key to successful business Key to successful business financing: financing:

• Obtain current assets with short-term loans

• Obtain fixed assets with long-term loans

Short Term LoansShort Term Loans• Vendors – trade credit• Commercial banks• Commercial loans – “collateral”• Accounts receivable loans• Revolving lines of credit• Inventory financing• Commercial finance companies• Factors – selling accounts receivable

Long Term LoansLong Term Loans– Commercial Banks– term loans with personal guarantees– equipment loans– real estate loans– Commercial Finance Companies– Equipment Manufacturers and

Distributors

Why would a business need Why would a business need additional capital?additional capital?

• sales growth

• expansion

• opportunities to reduce costs

• seasonal factors

• economic conditions

Tips for requesting loansTips for requesting loans• Select the bank carefully.• Prepare financial statements.• Make an appointment.• Dress like bankers dress.• Prepare to answer typical questions.• Prepare to guarantee the loan.

Typical Questions:Typical Questions:• How do you plan to spend the

money?

• How much money do you need?

• When do you need the money?

• When will the loan be repaid?

• What is the source of money for repaying the loan?