How to Obtain the Right Financing for Your Business

Chapter 7

How to obtain the right financing for your business

Estimating financial needs

The degree of uncertainty surrounding small firms long term financial needs primarily depends on whether the business is already operating or is just starting. If the business has an operating history its future needs can be estimated with relative accuracy even with large growth.

Q1- Discuss the basic rule to follow in financing a business venture?

A new business or any expansion of major business should be evaluated with great care.
Paying particular attention to its capital requirements. Example: the firm’s fixed assets should be financed with equity funds or with debt funds.
NO business can be financed entirely with debt funding nor would such as capitalization is desirable ever the creditor were willing to lend all the funds required. This will be risky for both creditor and business.

Q2-Why should small business manager assess working capital needs in advance?

Working capital which include the current assets, less current liabilities that a firm uses to produce goods and services and finance the extension of credit to customers. These assets include items such as cash, accounts receivable and inventories.
Management of working capital is always a central concern because they are undercapitalized cash receipt to pay for recurring expenses.
Small business managers must accurately estimate their working capital needs in advance to cover the needs plus the buffer for unexpected emergencies.

Using Cash Budget:

The useful tool for estimated financial needs is acash budget. Such a budget estimate what the out of pocket expenses will be incurred and when revenues from these sales are to be collected.
Sales are not constant over the year and the revenue is varying from one period to another.
Cash budget can help the manager predict when these financing needs will be the good and plan the firm’s funding accordingly.

Q3- what are some reasons small business entrepreneurs use equity and Debt financing?

Equity financing:

It is the owner’s share of the assets of company. In corporation, it is represented by shares of common or preferred stock depends on the legal form of ownership.
Equity financing in a corporation is evidenced by shares of either common or preferred stock.

Role of Equity Financing:

It is serving as a buffer that protects creditors from loos in case of financial difficulty.

Debt financing

It comes from lender who will be repaid at a specified interest rate within specified time span.

Small business uses it for several reasons:

The cost of interesting paid on debt capital is usually lower than the cost of outside equity and interest payment are tax deductible expenses.
An entrepreneur may be able to raise more total capital with debt funding than from equity source alone.
Because of debt payment are fixed cost, any remaining profit belong solely to the owners.

One type of financing debt is leasing facilities تأجيرالمرافق which is a contract that permit you to use someone else’s property such as real estate.

Benefit:

The payment are tax deductible
It may possible to lease equipment when unable to secure debt financing.

What type of Debt and Equity Securities?

Equity securities

All firms must have equity capital to start any business.
Common stock which representing the owner’s interest usually consist of many identical share. Each of which gives the holder one vote in all corporate elections.
Preferred Stock has a fixed par value and a fixed dividend payment, expressed as a percentage of pare value. It is usually conveys no voting rights to its holder.
Small company offering registration (SCOR) is the sale of common stock to the public through a regulated board such as AMEX

Debt Securities

Debt securities are usually in the form of loan.
Is usually made among short term securities mature in one year or less
Intermediate term securities mature in one to five years.
Long term securities mature after five years or longer.
Bonds are a form of debt security with a standard denomination, method of interest payment and method of principal repayment.
Mortgage Loan is long term debt that is secured by real property.
Chattel Mortgage loan is debt backed by some physical asset other than land such as machinery.
Many prefer asset based financing which accept as collateral the assets of a firm in exchange for the loan

Q5- list and discuss the primary sources of equity financing?

Self

Owner of small firms rely on their own capital which important source of financing.
More dependent on short term debt the long term debt.
Use external financing only occasionally
Owner prefers using their own funds to be comfortable and do not want to share control of the firm.

Small Business Investment companies (SBICs)

SBICs are private firms licensed and regulated the SBA to make venture investments in small firms.
It is supply equity capital and unsecured loan to small firms
Intend to make profit making institution
SBICs prefer to make loans to small firms rather than equity investment.

Venture capitalists:

Serve as a form of security blanket when needed
Makes investments based on projected future income and generally require a large return as either equity or profit.

Angel Capitalists

These angel capitalist or business angles are wealthy local business people and other investors who may be external sources of equity funding.
Provide up to four times as much total investment capital as venture capital.

Other sources

Business incubators help in managing in house and revolving loan funds, connection with angle investor and assist with loan application.
Employee stock ownership plans allow business to gain tax advantage and cash flow advantage by selling stock shares to workers.
Customer
Bartering المقايضه consist of two companies exchange item of roughly equal value. The uses such as business travel, debt collection, closing sale

Q6- list and discuss the primary sources of debt financing?

Trade Credit

Is extended by vendors on purchase of inventory, equipment and supplies.
With consignment selling payment to supplier are made only when the product are sold rather than when they are received in stock.

Commercial and other financial institutions

Provide small business owner with borrowed funds which is high than other alternatives but may be the most accessible.
Commercial bank which is dominant supplier of external financing to small firms. A line of credit permits a business to borrow up to a set amount without red tape.
Credit card another form of credit line.
Insurance companies are good source for small firms especially real estate ventures.

Q8- Evaluate the role of the SBA in providing operating and venture capital?

The primary purpose is to help small firms find financing.
Help small firms in several way such offering guarantees on loans and offering direct specialized financing.
Provide some venture capital through SBICs.
Licensed SBICs include specialized SBICs (SSBICs) to assist socially disadvantaged enterprise.

Guaranteed loans:

Guarantees 30 to 40 % of all long term loans to small business and guaranteeing repayment for a certain percentage of the loan.
Look for a debt to net worth ratio not more than 3:1 after the loan is granted.
Look for management ability and experience in the field of operation
Look for feasible business plan
Look for ability to repay the loan.

Specialized Program

Government contracts to be awarded to small, disadvantaged business along with counseling and bonding assistance.
Low documentation(LowDoc) loan program which can be used for loans of less than $100,000.
CAPLine revolving Line of credit initiative which obtain short term working capital through an established line of credit.
Women prequalification Loan program which allow women to receive prequalification from SBA for a loan guarantee of up to $250,000 before going to bank.