SMALL BUSINESS MANAGEMENT Game Developer Crowdfunding SMALL BUSINESS MANAGEMENT Mia Yogurt Chapter 6 Financing the Small Business Cottage cheese cake Molly Maid BrandMan

Small Business Financing The entrepreneur often require financing not only to start the business but also to provide capital to fund ongoing operations Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Small Business Financing The Importance of Capital and Planning How much do you need ? When will the funds be used ? How long will the money last ? Where can the money be raised and what type of financing (debit versus equity) will be used ? Do you need funds immediately ? Will I get anything else besides money ? Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Cottage Cheesecake Industry What aspects of Brad Miller's background would be positive for him to obtain financing for his business? What aspects would be negative? What are the advantages and disadvantages of equity financing for this business? What other sources of financing might he have accessed? Cottage cheese cake Cottage cheese cake

Small Business Financing Reasons For Financing of Ongoing Operations New Products and Services Acquisition / Joint Venture Expansion Capital expenditures Working capital needs

Small Business Financing Other management problems affecting financing underestimating financial requirements lack of knowledge of sources of equity and debt capital lack of skills in presenting a proposal for financing failure to plan in advance for needs poor financial control of operations Underestimating financial requirements Leads to under capitalization –shortage of cash Lack of knowledge of sources of debt & Equity Lack of skills in preparing & presenting a proposal for financing Failure to plan for future needs Leads to last minute scrambling for funds that you may not get or be very expensive Poor control of operations Leading to not making your debt obligations

Determining the Amount of Funds Needed Start-up Costs Ongoing Operating Costs The Owner’s Net Worth Capital requirements = start-up costs + operating requirements – owner assets available for investment

Determining the Amount of Funds Needed Start-up Costs Initial inventory, hiring costs, physical space First few months rent, payroll, advertising Prepaid items --utility & rent deposits, insurance Licenses & permits Ongoing Operating Costs Prepare cash flow statement (chapter 10) The Owner’s Net Worth hiring professionals— the cost of a lawyer, accountant, and perhaps other professional help getting insurance— the cost of protecting your business and personal assets planning your advertising and marketing— the cost of getting your product or service known in the marketplace hiring employees— the cost of hiring people to perform necessary tasks for businesses that require it planning the physical space— the cost of setting up your office, store, or other location special considerations for retail businesses— some of the special cost considerations of opening a storefront business, if that's your avenue miscellaneous costs— a look at those costs that any business will incur but that are often ignored or forgotten raising money— the cost of obtaining startup money, as well as some suggestions for potential sources of financing

new business is a retail establishment promotion, you plan to give buyers 90 days to pay Buy replacement inventory Buy initial inventory + Make drawing of this Assume your new business is a retail establishment that is selling high end men's clothes and, as a promotion, you plan to give buyers 90 days to pay. Your working capital needs could be huge. First, you have to buy your inventory, then, after it sells, pay for the replacement inventory. This could mean that you will not receive one dollar to pay bills for at least 90 days after you open the doors. If you do not plan for this working capital need in advance, you probably won't even stay in business for 90 days. plan for this working capital need in advance, If not,you probably won't even stay in business for 90 days.

Determining Types of Financing Equity (Ownership) Financing Private Investors Self, bootstrapping, friends, family, private, employees, sale of shares Corporate Investors Venture capitalist (vulture capitalists) Government Business Development bank of Canada (BDC) Canada Development Corporation (CDC) Provincial Programs Molly Maid Surviving High Tech

Advantages of Equity Financing no obligations for dividends or interest investor expertise equity expands borrowing power equity spreads risk of failure

Disadvantages of Equity Financing dilutes ownership and independence Disagreements Compromises legal costs

Determining Types of Financing Equity Financing Personal Funds Family and Friends Crowd-Funding Informal Risk (Angels) Corporate Investors Government Mia Yogurt Crowdfunding Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Debt Financing Advantages Obtain higher ROI by using leverage debt Interest costs are tax deductible; dividends from equity are not No loss of ownership control and greater flexibility with debt financing Easier to obtain than equity capital

Disadvantages Debt Financing Interest must be paid on borrowed money Increased paperwork requirements and lender monitoring Total risk on part of the owner

Sources of Debt Financing Private lenders shareholder loans Corporate lenders regular private lending institutions trust companies, credit unions, finance companies chartered banks Government Lenders May finance high debt , low equity firms May be flexible, lower rates, counseling More paper work, time to process is longer, more monitoring & control Game Developer

Determining Terms of Financing Types Short term (demand), medium term, long term Sources banks, private sources, factors, confirming houses; term lenders, leasing companies, foreign banks; trust companies

Preparing A Proposal to Obtain Financing Criteria Used in the Loan Decision 1. The Applicant’s Management Ability How much the applicant knows about the business How much care was taken in preparing the proposal Lending proposal document (fig 7-10) cash flow & income statement & Balance sheet ( chapters 3 & 10 ) Owners Salary & contingencies credit history of the borrower cash flow history and projections for the business collateral that is available to secure the loan character of the borrower loan documentation that includes business and personal financial statements, income tax returns, and frequently a business plan, and that essentially sums up and provides evidence for the first four items listed

Preparing A Proposal to Obtain Financing Criteria Used in the Loan Decision 2.The Proposal level of working capital Current assets – current liabilities current ratio 2:1 quick ratio 1:1 debt-to-equity ratio Collateral

Preparing A Proposal to Obtain Financing Criteria Used in the Loan Decision 3. Applicant’s background and creditworthiness personal information present debt and past lending history amount of equity the applicant has invested will the applicant bank with the lender Lender Relations

Clarks Sporting Goods Q 1. Estimate how much money Dave will need from outside sources to start his business. Q 2. Assuming Dave receives start‑up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so how much? Q 3. Should Dave pursue debt or equity sources of funds to get started?

Provincial Equity Capital Programs Appendices Provincial Equity Capital Programs Federal Government Assistance Programs for Small Business Provincial Government Financial Assistance Programs and Agencies for Small Business Venture Capital Firms in Canada