ENTR4503 Midterm Study Guide Four steps of Creativity 1 Preparation Incubation 2 Illumination 3 Implementation 4 Components of a Business Plan Introduction Description Financials Supporting documents appendix C s of a Business Plan Content Connected Clear quantify everything Concise Compelling Consistent aligns from beginning to end Banker s 5 Q s of Content 1 Amount 2 Purpose 3 Timing 4 Capacity 5 Collateral Business Development Sales Product Marketing Primary Business Activities Operations all activities of creating and delivering product Customer acquisitions marketing and sales Finances Debt Financing Fundamental Types of funding o Equity Contributed capital usually in the form of hard dollars or an asset Investors are not repaid If the business does not make a profit investors receive no financial benefits Investors have ownership in the company may have a say and some control Assume risk expect higher returns share in the company profits o Debt Borrowed money typically secured with an asset as collateral Loan payments are predictable must be made on schedule Secured by a personal signature Can force a bankruptcy if not Increase fixed costs lower profit and reduce cash flow Creditors do not share in ownership profits or dividends Do not receive any input in operations Uses of funding o Short term Used for day to day expenses and ongoing business operations Payroll supplies inventory Referred to as an operating loan as it funds operating expenses Scheduled for repayment in one year or less Seen as expenses on the income statement o Long term Used for investments in plant capital equipment or other investment opportunities Growth opportunities acquisitions Scheduled for repayment over more than one year Items are seen as assets on the balance sheet Sources of Funding o Sources of equity The founders Friends family fools Pros o Generally fairly easy to access funding fund start ups loose financing requirements arrangement o Not professional limited resources may place strain on o Difficult to find and obtain funding may be unprofessional o Fund start ups large fund amounts available o Difficult to obtain loss of ownerships control pressure to exit Angels private investors personal relationships o Fund start ups Cons Pros Cons Cons Venture capitalists Pros Equity markets o Sources of debt SBA government sources Consumer banks Commercial banks Customers and suppliers Leasing firms Equipment manufacturers suppliers Friends family fools o Sources of Short Term Debt Credit cards Pros The Credit one firm grants to another firm for the purchase of goods or o Easy to obtain funds lax lending requirements Cons Trade credit o High interest rates services Institutional creditors Banks asset based lenders factors o Bank Sources Pros Repayment with interest only o No profit sharing or ownership position Professional Cons Risk vs Rate of return for Capital require collateral Difficult to obtain loans do not typically fund startups set limits o High level of risk high rate of return Start ups o Medium level of risk medium rate of return growth stage company o Low level of risk low rate of return Acquisition Matching the sources and uses of funding for your business o Identify your needs o Determine the risk o Determine the expectation of return and rate o Identify the duration of funding short term or long term Where capital comes from o 61 trade credit o 56 traditional finance credit line mortgage loan lease o 39 credit card o 37 commercial bank loan Types of banks o Consumer banks Retail banks credit unions savings loans Basic services checking savings accounts auto loans mortgages line of credit home equity loans CDs safety deposit boxes o Commercial banks Commercial banks investment banks Basic services checking savings accounts real estate loans capital equipment loans short term loans line of credit foreign exchanges payment transaction processing Types of loans debt o Short term loans Short term loan line of credit o Long term loans Installment loan capital equipment loan Creditors lend against o Assets Accounts receivable inventory equipment real estate personal property o Cash flow Asset based lenders the sole security given to the lender Banks o Loans granted by a financial institution where the asset being financed constitutes o Regulated by strict government regulations and credit standards o The most risk averse lending source Generally only operate within a comfort zone of opportunities o Operate on high volume and low margins o Lines of credit preapproved short term loans against receivable or inventory o Demand personal guarantees and collateral in case of default o Place the burden on the applicant Bankers o Not investors or entrepreneurs they are lenders o High volume job in a low risk business they follow processes o Have career risk on bad loans and zero upside opportunity Do not deviate from the process its safer to say NO o Fiduciary responsibility to the bank the depositors From the Banks POV o Cost of underwriting and managing a loan is the same regardless the size of the loan o Low Net Margin per loan requires a high volume of loans o Limited regulated upside requires low limited loan risk o The losses from a bad loan can wipe out the profits from 20 30 good loans o What does a bank get from a loan The difference between deposits and loans a few Gross Margin After costs very little a couple of Net Margin The Bank Process o Uses a standardized process and credit scores o Place burden of documentation and application on the applicant o Demand collateral and guarantees o Provide little decision making latitude Low level people do small loan utilize credit scores Experienced people do larger loans All loans are reviewed for approval by a committee What bankers consider in a loan application o You o Your business A Short Business Plan Business Personal Financial Statements Collateral A Personal Guarantee o The business opportunity o The current business environment o The 5 C s of Credit The 5 C s of Credit o Capacity The business and individual s ability to repay the loan Review the cash flow to determine alternative courses of repayment available o Capital o Collateral o Character What you have invested in the business Assets pledged as a guarantee Equipment real estate inventory accounts receivables securities Personal guarantee signed document as additional reassurance Are you reliable Assesses the trustworthiness of candidates Criteria business experience knowledge