Financing – The Basics

•  What is Financing? •  Why Financing? •  How to Get Financing?

Three Types of Lending

1.  Short-term Financing •  Financing usually through notes to be paid within one year or

less, and paid in one sum

2.  Intermediate-term Financing •  Financing for one to five years, usually repaid on a monthly

basis

3.  Long-term Financing •  Financing for five or more years, such as real estate financing,

where repayment is made on a schedule over a period of many years

Financing

Banker’s Risk

•  Secured vs. Unsecured –  Secured Loan: Backed up by collateral –  Unsecured Loan: Not backed by collateral

•  Bankers are taking a risk on your business •  Keep your debt to worth ratio low

Debt to Worth

= Total Debt

Net Worth

Financing

Four Common Abuses of Funds

1.  Undercapitalization 2.  Excess Debt 3.  Insufficient Use of

Credit 4.  Friday-night Financing

Financing

Why Financing?

Sources of Financing: 1.  Your Savings 2.  Your Family 3.  Your Friends 4.  Banking Institution 5.  Professional Investor

Financing

Risk Assessment

•  What the bank will consider about your business: –  Experience of the borrower –  Experience with the borrower –  Ability of the borrower to pay back the loan –  Equity in the business –  Collateral, cosigners, and co-makers –  Terms of the loan

Financing

Six Steps to Getting Financing

1.  Identify different needs for funds within the business

2.  Determine how much money is needed 3.  Identify the type of money needed 4.  Schedule when the money is needed 5.  Develop a financing plan 6.  Implement and review your financing plan

Financing

Step #1: Identify Different Needs for Funds Within the Business

•  Base financing on business needs •  Don’t base business around financing

available –  What does your business need? –  When will it be needed? –  How long will it be needed for?

Financing

Step #2: Determine How Much Money is Needed

Calculate: 1. Your Capital Asset Cost 2. Your Working Capital 3. Your Safety Margin or Contingency Reserve

Financing

Components to Calculate Capital Needs

1. Total Capital Asset Cost

Financing

3. Safety Margin or Contingency Reserve

2. Working Capital Projections

Step #3: Identify the Type of Money Needed

•  Make sure the cost of debt does not exceed the potential return

•  Credit and debt allow you to grow

•  Ultraconservative philosophies of avoiding debt are not functional

Financing

Step #4: Schedule When the Money Needed

•  Avoid last minute planning

•  Friday-night Financing –  Desperation is generally

a sign of poor management

–  Clear warning to investors

Financing

Step #5: Develop a Financing Plan

•  Identify where you will secure the funds that are needed

•  Identify what actions are needed in order to secure the funds

•  Form a backup plan and avoid problems •  Keep in touch with financing prospects •  Keep the source of money in mind as you prepare the

proposals –  Design proposals to suit financier’s needs

Financing

Step #6: Implement and Review Your Financing Plans

•  Periodically update and review –  At least annually, and preferably more often

•  Make sure loaned proceeds are being used according to the plan –  Don’t mistake loan proceeds as operating profits

•  Stick to the plan – no extra preventable costs

Financing

Summary

Good financial management is the cornerstone for better, more satisfying, and more profitable business operations.

Financing

Question & Answer