Financing Your Business

Startup Costs You need to be sure you have all expenses accounted for. Examples: Equipment and Supplies Furniture and Fixtures Vehicles Remodeling Legal and Accounting Fees Licensing Fees

Personal Financial Statement In order to determine if you have the resources to finance your business, begin by assessing your Net Worth (or equity). Net Worth is the difference between what you own and what you owe (assets vs. liabilities). To do this you should prepare a personal financial statement.

Generating Capital There are two ways to generate capital for your business Equity financing Debt financing First you must calculate your debt to equity ratio. The relation between dollars you have borrowed (debt) vs. the dollars you have invested (equity) Total Liabilities ÷ Total Equity A high ratio means company has been funded through debt (red flag) Low ratio means company was financed through equity

Equity Financing Equity Capital: money invested in business in exchange for a share in the profits of the business. Places to gain equity capital Personal Contributions Friends and Relatives Venture Capitalists Individuals or companies that make a living investing in startup companies They look for companies who make above average profits, have a chance of making hundreds of millions within a few years, and are likely to go public Not a solid option for small business because of above criteria.

Debt Capital Debt Capital: is money loaned to a business with understanding that money will be paid back with interest. Friends/Relatives Banks

Bank Loans Secured Loans: loans backed by collateral Types of loans: (property that a borrower forfeits if he/she defaults on loan). Types of loans: Line of Credit Long-Term Loan Accounts Receivable Financing Inventory Financing

Be Ready A bank may decline you for a loan for these reasons: Business is a startup Lack of solid business plan Lack of experience Lack of confidence Inadequate personal investment

Other Sources of Loans Small Business Administration (SBA) Small Business Investment Co. (SBIC) Minority Enterprise SBIC’s Department of Housing and Urban Development (HUD) Economic Development Admin (EDA) State Governments Local Municipalities

Pro Forma Financial Statements The financial statements you prepare for your business plan are called pro forma financial statements and are based on projections. They consist of: Cash Flow Statement Income Statement Balance Sheet

Cash Flow Statement Definition: An accounting report that describes the way cash flows in and out of your business over a period of time Show how much cash you have to pay bills and whether you have enough to continue operating. Equation Cash Receipts – Cash Disbursements = Net Cash Flow