Game Developer
Crowdfunding
SMALL BUSINESS
MANAGEMENT
Mia Yogurt
Chapter 6
Financing the Small Business
Molly Maid
Cottage cheese cake
BrandMan
Small Business Financing

The entrepreneur often require
financing not only to start the
business but also to provide capital
to fund ongoing operations
Copyright © 2014 McGraw-Hill Ryerson.
All rights reserved.
Small Business Financing

The Importance of Capital and Planning
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How much do you need ?
When will the funds be used ?
How long will the money last ?
Where can the money be raised and what
type of financing (debit versus equity) will be
used ?
Do you need funds immediately ?
Will I get anything else besides money ?
Copyright © 2014 McGraw-Hill Ryerson.
All rights reserved.
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?
Cottage cheese cake
Small Business Financing

Reasons For Financing of Ongoing
Operations
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New Products and Services
Acquisition / Joint Venture
Expansion
Capital expenditures
Working capital needs
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
Determining the Amount of Funds Needed
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Start-up Costs
Ongoing Operating Costs
The Owner’s Net Worth
Capital requirements = start-up costs + operating requirements –
owner assets available for investment
Determining the Amount of Funds Needed
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Start-up Costs
Initial inventory, hiring costs, physical
space
 First few months rent, payroll, advertising
 Prepaid items --utility & rent deposits,
insurance
 Licenses & permits
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Ongoing Operating Costs
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Prepare cash flow statement
The Owner’s Net Worth
(chapter 10)
new business is a
retail establishment
promotion, you plan to give
buyers 90 days to pay
Buy initial
inventory
+
Buy
replacement
inventory
plan for this working capital need in
advance, If not,you probably won't
even stay in business for 90 days.
Determining Types of Financing
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Equity (Ownership) Financing
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Private Investors
 Self, bootstrapping, friends, family, private,
employees, sale of shares
Corporate Investors
 Venture capitalist (vulture capitalists)
Government
 Business Development bank of Canada (BDC)
 Canada Development Corporation (CDC)
 Provincial Programs
Molly Maid
Advantages of Equity Financing
 no
obligations for dividends or interest
 investor
expertise
 equity
expands borrowing power
 equity
spreads risk of failure
Disadvantages of Equity Financing

dilutes ownership and independence

Disagreements

Compromises

legal costs
Determining Types of Financing
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Equity Financing
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Personal Funds Mia Yogurt
Family and Friends
Crowd-Funding
Crowdfunding
Informal Risk
(Angels)
Corporate Investors
Government
Copyright © 2014 McGraw-Hill Ryerson.
All rights reserved.
Debt Financing
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Advantages
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Obtain higher ROI by using leverage debt
Interest costs are tax deductible; dividends
from equity are not
No loss of ownership control and greater
flexibility with debt financing
Easier to obtain than equity capital
Debt Financing
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Disadvantages
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Interest must be paid on borrowed
money
Increased paperwork requirements and
lender monitoring
Total risk on part of the owner
Sources of Debt Financing
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Private lenders
 shareholder loans
Corporate lenders
 regular private lending institutions
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trust companies, credit unions, finance companies
chartered banks
Government Lenders
 May finance high debt , low equity firms
 May be flexible, lower rates, counseling
 More paper work, time to process is longer,
more monitoring & control
Game Developer
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

Criteria Used in the Loan Decision
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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
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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?
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