Financing the Small Business

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Financing the Small Business

• Dr. Muslim Suardi, MSi., Apt.
• School of Pharmacy, Faculty of Sciences
• UNIVERSITY OF ANDALAS

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Financial Plan

1. Initial Capitalization Plan
2. Projected Income Statement
3. Projected Operating Expenses
4. Cash Flow Projection

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Initial Capitalization Plan

• The obstacle that prevents many entrepreneurs
  from fulfilling their dreams of starting a
  business is initial capitalization

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Capitalization

• The activity of obtaining all capital assets
  necessary to operate a business

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Capital Assets

• Equipment
• Inventory
• Operational resources (including cash) that the
  business owns uses in the operation of its
  activities

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Challenge of Capitalization

• The challenge of capitalization for the
  entrepreneur is determining where to obtain the
  money necessary to purchase and/or lease the
  items needed to successfully start a business

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Financial Plan

• How much money is needed?
• How much income is needed for personal living
  expenses?
• What amount of profit does the entrepreneur
  consider?
• The amount of capital necessary to achieve the
  objective

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Financial Plan

• A problem many entrepreneur encounter is that
  they do not develop a realistic plan of
  investment to earn the needed profits.
• When entrepreneur are not able to obtain the
  resources needed to successfully complete the
  businesss objective, the entrepreneur is
  considered undercapitalized
• Planning the amount of capital needed starts with
  making the sales projection

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Capital Needs

• Starting Inventory
• Fixture Equipment
• Decorating remodeling
• Installation Cost
• Utility deposits
• Legal other fees
• Grand Opening Promotion
• Cash on hand
• Other

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Monthly Operating Expenses

• To keep the business running smoothly
• To estimate operating expenses, calculate the
  monthly rent ant employees salaries, determine
  the average cost of utility services, insurance
  premiums, other charges

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Initial Operating Expenses

• Owners salary
• Other salary
• Rent
• Advertising
• Supplies
• Utilities
• Accounting
• Insurance
• Loan principal interest
• Taxes, licenses
• Miscellaneous

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Financing a New Business

• Having access to enough capital, or money, is
  critical to the success of a business, especially
  in the start-up phase
• What happens if you do not have enough capital to
  start your business?
• Should you give up your dream?
• Absolutely not!
• There are many sources of funds for
  entrepreneurs!

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Analyzing Financial Sources

• Debt Capital
• Equity Capital

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Debt Capital

• Creditor capital
• Borrowed money

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Debt Capital

• Friends
• Relative
• Commercial banks
• Savings loan institutions
• Supply vendors
• State/local business development funds
• Small Business Administration

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Friends Relative

• Establishing trust is usually requirement for
  borrowing money.
• In many cases, it was encouraged from these
  people that prompted the idea to start the
  business in the first place.

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Commercial banks

• Types of financing available
• Traditional loans
• Line of Credit
• Installment loan
• Mortgage loans
• Accounts Receivable Financing
• Inventory financing
• Sales Contracts

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Savings loan institutions

• Many of the loans that are available at
  commercial banks are also available at savings
  loan institutions, often at a lower cost. These
  institution also provide some types of financing
  that commercial banks generally do not, such as
  factoring

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Supply vendors

• A company that supplies merchandise to a business
  can provide a source of working capital known as
  trade credit to that business
• Trade credit a type of financing that allows
  delayed payment for merchandise

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Business Development Funds

• States
• Communities

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Small Business Administration

• Government
• Provide financial assistance to small business
  owners, either directly or indirectly

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Equity Capital

• Owner capital
• The money invested in a business by the owner or
  owners
• This might include the owners personal savings
  or investment by others, such as private
  investors, venture capitalists, stockholders,
  investment bankers, or partners

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Equity Capital

• This might include the owners personal savings
  or investment by others, such as private
  investors, venture capitalists, stockholders,
  investment bankers, or partners

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Equity Capital

• Personal savings
• Private investors
• Venture capitalists
• Sale of stock
• Investment bank
• Partnership

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Personal savings

• The best source
• One of the advantage of using personal savings to
  start the business is that the entrepreneur keeps
  more of the businesss profits.

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Private investors

• You may be able to obtain financial assistance
  from people who have excess income available for
  investment purposes
• Your banker, lawyer, or accountant may be able to
  provide a referral for a such a source.

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Venture capitalists

• Only as a last resort
• Ventures capitalists do not often invest in
  start-ups. They prefer to invest in established
  business and business that have potential for an
  extremely high return on investment

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Sale of stock

• Established business can raise capital by selling
  stock, or small pieces of the business

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Investment bank

• Investment banks specialize in bringing together
  entrepreneurs who need funds with individuals or
  groups that have money to invest

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Partnership

• Entrepreneurs who establish partnerships may seek
  a partner or partners for two reasons.
• They may want to increase the businesss capital
  or acquire expertise in areas that are unfamiliar
  to them

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Conclusions

• Realistic!
• Motivation
• Success