Session 7: Financing
7a. Financing Proposal 7b. Financial Planning 7c. Personal Finance 7d. Funding Support7e. Financial Calculators 7f. Finance Counseling Summary
PURCHASE OPTIONAL
WORKBOOK


1. Self-Assessment
2. Business Idea
3. Market Analysis
4. Management Skills
5. Business Planning
6. Forecasting
7. Financing
8. Support Help
9. Venture Launch
10. Monitor Progress
Graduation Certificate

Module 7a: The Financing Proposal

The traditional business plan format typically requires few alternations to also serve as a first-rate financing proposal. There are some areas of your plan that will be of little or no use to prospective financiers. Personal histories, for example, can and should be replaced by resumes. The business plan section on deviation analysis would typically not be required as well. This is an internal control process and one not normally useful to outsiders. The main difference between your business plan and financing proposal lies in the fact that while the main function of the plan is to enable you to understand the complexities of the business, the function of a financing proposal is to show your prospective backers that you not only know what you are doing, but will also be able to make their investment as risk free as possible.

As you begin to establish your financing strategy for your new venture, it is important to be aware of different sources and types. The use of an Analytical Financing Chart (next section) will help you to determine your financing needs, types, and sources. Venture capital or other forms of higher-risk capital represent ways in which many high technology ventures have been financed over the past decade. More conventional forms of entrepreneurial financing, such as bank loans and other institutional credit-based services, have consistently served the smaller business venture. In each situation, however, assessing the longer-term viability of the business concept is equally important to the lender.

Although the greatest dollar amounts of financing for many smaller businesses are found in trade credit (that is, money owed to suppliers), the most important single financing source is your local bank.

Such esoteric financing tools as factoring or discounting receivables, bonds, convertible debentures, and other such debt instruments are typically not utilized by smaller businesses. If you have need of them, your banker and accountant can help you. If you do not have both a banker and an accountant, you surely have no need of specialized financing and probably should reconsider going into business at all.

In seeking financing, it is essential to recognize the difference between debt and equity. When you go to a bank, you are seeking "debt money," a loan that you repay over a period of time at a certain additional cost of interest.

The money you and others invest in the venture is ordinarily "equity," that is, money invested in a business that will not be repaid unless the ownership rights that it represents are sold to another. Debt financing does not lead to sharing ownership of your business with the financier; equity financing does. " Control" is another matter: Your banker or some other lender frequently exercises substantial control over a business through various legal documents (for example, agreements not to further borrow, working capital maintenance, cash reserves) or through suggestion but still does not own a share of the venture. Debt pays interest, usually for a finite period; equity pays (shares) profits forever.

The distinction between debt and equity is of particular interest to a banker because the more debt there is in relation to equity (that is, the greater the "leverage"), normally the higher the risk. A high debt-to-worth ratio (worth is roughly equivalent to equity but includes certain kinds of specialized debt) indicates high risk. High risk costs money, if indeed money can be found for such a situation. Why? Because debt money is rented money, and the rent must be paid no matter what the business is doing. A higher than normal debt service obligation requires that a business perform better than normal just to meet this additional demand. Very simply, if you can't meet your debt payment, you go out of business.

The problem here is important. Sometimes entrepreneurs, having read books on getting rich using other people's money, will find so much debt financing that they can never get ahead no matter how hard they work. Without capital (that is, permanent, non-repayable money invested in the business) they may spin their wheels forever, a problem known as "overtrading." The trade ratios of sales/worth are guidelines to follow. References to these and other valuable business planning data may be found at http://www.bizbound.com/listof.html.

Now - on to 7b: Financial Planning Worksheet