SMALL BUSINESS
MANAGEMENT
Chapter Seven
Financing the Small Business
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Small Business Financing
 Financing
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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
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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 Owner’s Net Worth
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Determining Types of Financing
 Equity
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(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 Applicant’s 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. Applicant’s 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 owner’s
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 ?
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