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  • 1. Chapter 9 Small Business Finance
  • 2. The Five Cs of Credit
    • Capacity - ability to repay the loan.
    • Capital - applicant’s personal financial strength (assets minus liabilities)
    • Collateral - pledged security for the loan
    • Character - judged on the basis of past repayment patterns.
    • Conditions - economic climate (recession makes it difficult to get credit)
  • 3. Forms of Financing
    • Debt Financing - is the use of borrowed funds to finance a business.
        • Principal amount of money borrowed from the lender.
        • Interest rate the amount of money paid for the use of borrowed funds. The best customers get the lowest rate.
        • Fixed rate refers to a loan with an interest rate that remains constant Typically has a higher initial rate than a variable rate loan.
        • Variable rate refers to a loan with an interest rate that changes over the life of the loan. Typically tied to prime rate or federal funds rate.
  • 4. Forms of Financing
    • Equity Financing - the sale of common stock or the used of retained earnings to provide long-term financing.
      • Providers of equity financing own a portion of the business and are paid via dividends and increased value in the business.
      • Dividends are payments based on the net profits of the business and made to the providers of equity capital.
  • 5. Sources of Debt Financing
    • Commercial Banks
      • Unsecured Loans are short-term loans for which collateral is not required.
          • Typically self-liquidating which means that they will be paid directly from revenues from use of the loan
          • For example: the purchase of inventory
      • Line of Credit is an agreement that makes a specific amount of short-term funding available to a business as it is needed.
          • May be used to cover overhead
  • 6. Sources of Debt Financing
    • Commercial Banks
      • Demand Note is a short term loan that must be repaid (both principal and interest) in a lump sum at maturity.
          • The bank may demand repayment before maturity if business is in trouble.
      • Floor Planning is a type of business loan that is generally used for “big-ticket” items. The business holds the item in inventory and pays interest, but it is actually owned by the lender until the item is sold.
  • 7. Sources of Debt Financing
    • Commercial Banks
      • Installment Loans are loans made to businesses for the purchase of fixed assets such as equipment and real estate.
          • These loans are repaid in periodic payments that include accrued interest and part of the principal.
          • The maturity of the loan is typically equal to the usable life of the asset.
      • Balloon Note is a loan that requires the borrower to make small monthly payments, with the balance of the loan due at maturity.
  • 8. Sources of Debt Financing
    • Commercial Finance Companies extend short to intermediate credit to businesses that cannot easily obtain credit.
        • Interest rates are considerably higher .
    • Leasing a finance company may purchase the goods needed by a small business and rents (includes interest) them to the small business.
  • 9. Sources of Debt Financing
    • Factoring Accounts Receivable is the practice of raising funds through the sale of accounts receivable.
        • Accounts receivable are sold to a finance company at a discounted amount (typically 55% - 80% of value)
    • Insurance Companies
        • Policy Loans are loans made to a business by an insurance company, using the business’s insurance policy as collateral.
  • 10. Sources of Debt Financing
    • Federal Loan Programs
        • SBA Loan is a loan made to small business through a commercial bank, of which a portion is guaranteed by the Small Business Administration
          • “ 7 (a) program loans are loans that are 90% guaranteed by the SBA up to $500,000.
          • Start-up businesses must provide financial statements for the past three years and financial projections for the next three years.
          • Must also provide proof of adequate investment by the owners (typically 20 - 30% equity).
  • 11. Sources of Debt Financing
    • Federal Loan Programs
        • SBA Loan
          • Direct Loans are those loans made directly by the SBA to a small business, without the participation of a bank.
            • Typically made to special groups of people - Vietnam Veteran and Disabled Veterans Loans.
            • Limited to $150,000.
          • Certified Development Company nonprofit organization sponsored by either private interests or by state/local governments.
            • Typical arrangement might be 50% of total provided by a lender, 10% by the borrower, 40% by certified development company.
  • 12. Sources of Debt Financing
    • Federal Loan Programs
        • SBA Loan
          • LowDoc program allows a qualified individual to borrow up to $100,000 with a one page application.