SMALL BUSINESS
MANAGEMENT
Chapter 7
Financing the Small Business
Cottage Cheesecake Industry
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What aspects of Brad Miller's background
would be positive for him to obtain
financing for his business? What aspects
would be negative?
What are the advantages and
disadvantages of equity financing for this
business?
What other sources of financing might he
have accessed?
Small Business Financing
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Reasons For Financing of Ongoing
Operations
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New Products and Services
Acquisition / ______ Venture
Expansion
Capital expenditures
Working ______ needs
Small Business Financing
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Other management problems
affecting financing
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underestimating ______ requirements
lack of knowledge of sources of equity and
debt capital
lack of skills in ______ a proposal for financing
failure to plan in advance for needs
poor financial ______ of operations
Determining the Amount of Funds Needed
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Start-up Costs
Ongoing ______ Costs
The Owner’s Net Worth
Determining the Amount of Funds Needed
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Start-up Costs
Initial ______
 First few months rent, payroll, advertising
 Prepaid ______ --utility & rent deposits,
insurance
 Licenses & permits
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Ongoing Operating Costs
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Prepare cash ______ statement
The Owner’s Net Worth
(chapter 10)
Determining Types of Financing
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Equity (Ownership) Financing
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Private Investors
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Self, bootstrapping, ______ , family,
private, employees, sale of shares
Corporate Investors
Government
Business Development ______ of Canada
(BDC)
 Canada Development Corporation (CDC)
 Provincial ______
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Advantages of Equity Financing
 no
obligations for dividends or interest
 investor ______
 equity expands borrowing power
 equity spreads ______ of failure
Disadvantages of Equity Financing
dilutes ______ and independence
 disagreements
 compromises
 legal ______

Debt Financing
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Advantages
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Obtain ______ ROI by using leverage
debt
Interest ______ are tax deductible;
dividends from equity are not
No loss of ownership control and
greater flexibility with debt financing
Easier to ______ than equity capital
Debt Financing
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Disadvantages
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Interest must be paid on borrowed
money
Increased ______ requirements and
lender monitoring
Total risk on ______ of the owner
Sources of Debt Financing
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Private lenders
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Corporate lenders
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shareholder loans
regular ______ lending institutions
 trust companies, credit unions, finance
companies
 chartered banks
Government Lenders
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May finance ______ debt , ______ equity firms
May be flexible, lower rates, counseling
More paper work, time to process is longer, more
monitoring & control
Determining Terms of Financing
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Types
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Short term (demand), medium term,
long term
Sources
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banks, private sources, factors,
confirming houses; term lenders,
leasing companies, foreign banks; trust
companies
Preparing A Proposal to Obtain Financing
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Criteria Used in the Loan Decision
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1. The Applicant’s Management Ability
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How much the applicant knows about the business
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How much care was taken in preparing the proposal
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Lending proposal document
cash flow & income statement & Balance sheet ( chapters 3
& 10 )
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(fig 7-10)
Owners Salary & contingencies
Preparing A Proposal to Obtain Financing
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Criteria Used in the Loan Decision
2.The Proposal
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level of working capital
 Current assets – current liabilities
current ratio 2:1
quick ratio 1:1
debt-to-equity ratio
Collateral
Preparing A Proposal to Obtain Financing
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Criteria Used in the Loan Decision
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3. Applicant’s background and
creditworthiness
personal information
 present ______ and past lending history
 amount of equity the applicant has
invested
 will the applicant bank with the lender
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Lender Relations
Clarks Sporting Goods
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Q 1. Estimate how much money Dave will
need from outside sources to start his
business.
Q 2. Assuming Dave receives start-up
financing from a bank, as calculated in
question 1, will he require an operating line of
credit during the first four months of
operation? If so how much?
Q 3. Should Dave pursue debt or equity
sources of funds to get started?
Concept Checks
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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?
Concept Checks
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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 ?
Concept Checks
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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 ?
Concept Checks
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10. What can the entrepreneur do if
he/she is unsuccessful in obtaining
financing ?
Appendices
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Provincial Equity Capital Programs
Federal Government Assistance
Programs for Small Business
Provincial Government Financial
Assistance Programs and Agencies
for Small Business
Venture Capital Firms in Canada