Forms of Financing
What is financing?
Obtaining money for business purposes.
Factors affecting the cost and method of financing:
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How much money does the firm need to borrow?
How long is the money needed for?
What collateral is being assigned to the debt?
Does the future look good for the business?
What stage of the business life cycle is the company
currently in?
 Do you have a good personal history?
 What are the conditions in the economy?
Sources of Financing:
1. Owner Investment – sometimes this is the only available
source of financing because the owner has an unproven track
record, lacks collateral, has a poor business plan, or maybe
has a new idea that investors/lenders don’t believe in.
2. Private Loans (Family and Friends) – are often the only
other option besides an owner investment for a young
company. These loans often come with very cheap or
nonexistent interest rates and the lenders are commonly
referred to as “angel” investors.
3. Accounts Payable – if a business is granted 30 days credit
from a supplier, this essentially becomes a form of short term
financing. The interest rate over the 30 days is typically zero
because suppliers offer credit as a courtesy to good
customers.
Suppliers grant credit based on some of the following
factors:
 Number of years in business
 Value of the business
 Minimum financial ratios met
 Level of sales and cash flow
 Good credit rating
 Favourable payment history with other vendors
 Business history of owners/managers
Young businesses typically have a hard time getting credit
from its suppliers. Reputable businesses can sometimes
negotiate terms longer than 30 days.
4. Notes Payable – a written promise to pay a specific amount
of money by a specified date, including any interest.
Suppliers will sometimes turn your accounts payable into a
notes payable if you are unable to pay your invoices within
the 30 day time period.
Example: Converting an accounts payable into a note
payable.
April 1
A/P – ABC Electronics
3,000
Notes Payable
3,000
Issued a 9% note for 4 months to guarantee
debt to ABC Electronics.
July 31
Notes Payable – ABC Electronics
3,000
Interest Expense
90
Bank
3,090
Paid the 4-month 9% note to ABC Electronics.
5. Operating Line of Credit – a temporary source of financing
provided by banks that companies often use to cover short
term cash flow problems. These lines of credit are often set
up as an extension of the bank account and allow a company
to go into overdraft up to the amount of the line of credit. The
balance on a line of credit may fluctuate daily and interest is
usually calculated on the average daily balance over a month.
6. Bank Loans – lump sums of money provided by a bank to
help a business purchase assets. Once a company has a bank
loan, they are often required to provide regular financial
statements and maintain certain financial ratios.
7. Bonds – a long term note that promises repayment of the
principal amount on a certain date (maturity date) and pays
regular interest payments. Bonds allow for borrowing from a
large number of investors and provide long-term financing.
Features of bonds:
 Contain a face value (par value) which is the amount
borrowed.
 Bond interest must be paid off before profits can be
paid out.
 Bond owners have no claims to profits.
 Bonds can be resold.
Example: Issued 6%, 20 year bonds on July 1 worth
$100,000 and interest paid semi-annually.
July 1
Bank
Bonds Payable
Issued 6% 20-year bonds
Dec 31
100,000
100,000
Bond interest expense
Bank
Paid 6-month interest on 6% bonds
3,000
3,000
8. Common Stock – companies sell shares to individual
investors when they cannot borrow additional money. The
money is not repayable, but the new owners are now entitled
to a share of the profit and some of the control.
9. Venture Capital – financing provided by companies known
as venture capitalists who are willing to invest in companies
in return for an equity stake. They often provide financing to
high risk companies such as new businesses and in return
want control management decisions and make a profit.
10. Government Grants – our government will give out nonrepayable money to companies they think will be successful
in industries that are critical to the success of Canada. The
government recognizes innovations and improvements by
helping to finance your company’s growth.
11. Federal Business Development Bank (FBDB) – a crown
corporation that is designed to provide the following
resources to Canadian businesses:
 Financial loans and loan guarantees
 Financial and strategic planning
 Management Training
 Management Consulting