Section 13.1 Start-Up Investment

Section 13.2 Obtaining Financing

OBJECTIVES

Describe start-up capital and explain how payback is calculated

Explain bootstrapping strategies

2Section 13.1: Start-Up Investment

Start-Up Investment

Start-up expenditures are those expenses associated with opening a new business.

Cash reserves are needed for an emergency fund and a reserve for fixed expenses. The emergency fund is the amount of money a business

should have available in the first three to six months for the emergencies that often arise when a company is just beginning.

Businesses establish a reserve to cover their fixed expenses for at least three months. The reserve for fixed expenses is maintained for the life of the business and is used if the company should experience a downturn in sales.

3Section 13.1: Start-Up Investment

Payback

4Section 13.1: Start-Up Investment

Payback is the amount of time, measured in months, that it takes a business to earn enough in profit to cover the start-up investment.

Bootstrapping

Many successful entrepreneurs began their businesses by

bootstrapping, or with very little borrowed money, through

such strategies as: Using personal savings Using credit cards

5Section 13.1: Start-Up Investment

OBJECTIVES

Identify the advantages and disadvantages of debt financing

Identify the advantages and disadvantages of equity financing

Describe some specialized sources of financing Describe how debt and equity financing affect

the balance sheet

6Section 13.2: Obtaining Financing

Debt Financing

There are three main sources of debt financing: Banks are the major source of debt financing for

entrepreneurs. To determine how much it might be willing to loan you, the bank will review your business’s debt-to-equity ratio.

Credit unions are nonprofit cooperative organization that offer low-interest loans to members.

Relatives and friends are a common source of start-up loans for many entrepreneurs.

7Section 13.2: Obtaining Financing

Equity Financing

There are three main sources of equity financing: Relatives and Friends. As with debt financing, relatives and

friends are a source of start-up capital for many entrepreneurs. Unlike debt, however, they will take a share of your company.

Angels and Venture Capitalists. An angel is an investor who is interested in financing start-up ventures. Venture capital is money that is invested in a potentially profitable

business by a specialized company whose purpose is to invest in start-ups.

Partners. The most common source of equity financing is giving a percentage of the ownership of a business to a partner.

8Section 13.2: Obtaining Financing

Specialized Sourcesof Financing

There are four specialized sources that may provide either debt or

equity financing:

Small Business Investment Companies (SBICs). Provide equity financing, as well as loans, for small businesses.

Minority Enterprise Small Business Investment Companies (MESBICs). These are private investment firms, chartered by the Small Business Administration, that provide both debt and equity financing for new small businesses.

Customer Financing. This can be either debt or equity financing.

Barter Financing. This financing method involves the trading of items or services between businesses.

9Section 13.2: Obtaining Financing

Effects of Financing on

Your Balance Sheet

Debt Financing Borrowing money for a business increases its debt

(liabilities). You must repay the loans or you risk losing the business.

Equity Financing When using equity financing, your owner’s equity

changes. With equity financing, you give up some of your company and perhaps some control. Consider the consequences of using equity financing to obtain capital.

10Section 13.2: Obtaining Financing