Stage 10 Arranging Financing

How will you finance your business? Sources of Financing How will you finance your business? Personal savings Credit from suppliers Loans and mortgages from banks, credit unions and others Government assistance programs Love money Equity capital from private sources Leasing Friends and neighbours Local professionals and angel investors Prepare loan or grant request package Employees Venture capitalists

Debt vs. Equity Advantages of Debt Financing Useful for meeting a short-term deficit in cash flow Do not have to give up or share control of your business The term of the debt is generally limited May be acquired from a variety of lenders Information needed to obtain a loan is generally straightforward and part of your business plan The interest paid is tax deductible

Debt vs. Equity (Continued) Disadvantages of Debt Financing Can be difficult to obtain for a risky project Taking on too much debt can be a burden on your cash flows If the funds aren’t used properly, it may be difficult for the business to repay the loan If it is a “demand” loan, it can be called by the lender at any time The lender may require you to provide a personal guarantee for the loan Lenders will often insist on certain restrictions being put into place

Debt vs. Equity (Continued) Advantages of Equity Financing An appropriate investor can contribute expertise, contacts, and new business as well as money Equity may be the only option to finance high-risk ventures Equity can be used to fund larger projects with longer time frames

Debt vs. Equity (Continued) Disadvantages of Equity Financing You may have to give up some ownership and control of the business There is always the danger of incompatibility and disagreement among the investors It is much more difficult to terminate the relationship in disagreements occur

Major Sources of Funds Personal Funds “Love Money” Banks and Similar Institutions Operating Loans Term Loans Federal Government Canada Small Business Financing Program Industrial Research Assistance Program (IRAP) Program for Export Market Development (PEMD) Community Futures Development Corporations (CFDC) Women’s Enterprise Initiative Loan Program Aboriginal Business Canada – Youth Entrepreneurship Business Development Bank of Canada (BDC) Continued

Major Sources of Funds (Continued) Provincial Government Programs Venture Capital and “Angel” Investors Other Sources of Financing Personal Credit Cards Canadian Youth Business Foundation Suppliers’ Inventory Buying Plans Leasing vs. Buying Negotiated Leasehold Improvements Advance Payment from Customers

Exit Strategies for Private Investors Acquisition of the business by a third party Sale of the investor’s interest to a third-party investor Buy-back agreement Management or employee buyout (ESOP) Debt repayment An initial public offering (IPO)

Getting the Best From Your Banker Know what your banker is looking for Don’t “tell” your banker, “show” him Interview your banker Passion makes perfect Ask for more money than you need Get your banker involved in your business Increase your credit when you don’t need it Make professional introductions If all else fails, keep looking

Video Questions What do young entrepreneurs like Chris and Larry risk when they put everything they have and can raise into a business that always seems to be on the verge of a meltdown? How did Chris and Larry manage to solve their financial woes even though the solution was only temporary? What are the risks of giving up control of your company even though it may be only partial control? What are the advantages and disadvantages of a small company like Kraves going international in a large market like the US with many strong, established competitors?