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

1. Equity financing2. 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$ (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