SMALL BUSINESS MANAGEMENT

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SMALL BUSINESS MANAGEMENT

• Chapter Seven
• Financing the Small Business

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Small Business Financing

• Financing Ongoing Operations
• New Products and Services
• Acquisition / Joint Venture
• Expansion
• Capital expenditures
• Working capital needs

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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

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Determining the Amount of Funds Needed

• Start-up Costs
• Ongoing Operating Costs
• The Owners Net Worth

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Determining Types of Financing

• Equity (Ownership) Financing
• Private Investors
• Corporate Investors
• Government
• Business Development bank of Canada (BDC)
• Canada Development Corporation (CDC)
• Provincial Programs

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Advantages of Equity Financing

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

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Disadvantages of Equity Financing

• dilutes ownership and independence
• disagreements
• compromises
• legal costs

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Debt Financing

• Advantages of Debt Financing
• Disadvantages of Debt Financing

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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 with debt financing
• easier to obtain than equity capital

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Debt Financing

• Disadvantages
• Interest must be paid and interest rates are
  higher
• increased paperwork requirements and lender
  monitoring
• total risk on part of the owner

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Sources of Debt Financing

• Private lenders
• shareholder loans
• Corporate lenders
• Regular Private Lending Institutions
• Trust companies, credit unions, finance companies
• chartered banks
• Government Lenders

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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

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Preparing A Proposal to Obtain Financing

• Criteria Used in the Loan Decision
• 1. The Applicants Management Ability
• How much the Applicant Knows about the Business
• How much care was taken in preparing the proposal

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Preparing A Proposal to Obtain Financing

• 2. The Proposal
• level of working capital
• current ratio
• quick ratio
• debt-to-equity ratio

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Preparing A Proposal to Obtain Financing

• 3. Applicants 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

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Appendices

• Provincial Equity Programs
• Federal Government Assistance Programs for Small
  Business
• Provincial Government Assistance Programs for
  Small Business
• Venture Capital Firms in Canada

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Concept Checks

• 1. What problems are often the result of lack of
  management competence and experience ?
• 2. What are some of the operating costs involved
  in determining the start up capital needed ?
• 3. Why is it important to determine the owners
  net worth?

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Concept Checks

• 4. What are the sources of equity financing for
  the small business ?
• 5. What are the advantages and disadvantages of
  equity financing ?
• 6. What are the advantages and disadvantages of
  debt financing ?

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Concept Checks

• 7. What are the major sources of debt financing ?
• 8. What are the potential advantages and
  disadvantages of borrowing through government
  lenders ?
• 9. What criteria do lenders use in making the
  loan decision ?

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Concept Checks

• 10. What can the entrepreneur do if he/she is
  unsuccessful in obtaining financing ?