SB Finance Summary of the lesson: 1.Initial Capital Requirements. 2.Forms of Capital: Debt, Equity and Other Loan Terminology. 3.Found rising and Sources of Capital.

 The fundamental financial building blocks for an entrepreneur are recognizing  (1)what assets are required to open the business;  (2) what expenses will be required;  (3) which expenses cannot be changed and must be paid, called fixed costs;  (4) knowing how these costs will be financed. Initial Capital Requirements

 Short-term assets. Assets that will be converted into cash within one year.  Long-term assets. Assets that will not be converted into cash within one year. Defining Required Assets

 A traditional guideline used by many lenders is the five “Cs” of credit, where each “C” represents a critical qualifying element: The Five “Cs” of Credit

 1. Capacity. Capacity refers to the applicant’s ability to repay the loan. It is usually estimated by examining the amount of cash and marketable securities available, and both historical and projected cash flows of the business. The amount of debt you already have will also be considered. The Five “Cs” of Credit

 2. Capital. Capital is a function of the applicant’s personal financial strength. The net worth of a business—the value of its assets minus the value of its liabilities— determines its capital. The bank wants to know what you own outside of the business that might be an alternate repayment source The Five “Cs” of Credit

 3. Collateral. Assets owned by the applicant that can be pledged as security for the repayment of the loan constitute collateral. If the loan is not repaid, the lender can confiscate the pledged assets. The value of collateral is not based on the assets’ market value, but rather is discounted to take into account the value that would be received if the assets had to be liquidated, which is frequently significantly less than market value. The Five “Cs” of Credit

 4. Character. The applicant’s character is considered important in that it indicates his apparent willingness to repay the loan. Character is judged primarily on the basis of the applicant’s past repayment patterns, but lenders may consider other factors, such as marital status, home ownership, and military service when attributing character to an applicant. The lender’s prior experience with applicant repayment patterns affects its choice of factors in evaluating the character of a new applicant. The Five “Cs” of Credit

 5. Conditions. The general economic climate at the time of the loan application may affect the applicant’s ability to repay the loan. Lenders are usually more reluctant to extend credit in times of economic recession or business downturns. The Five “Cs” of Credit