Business Environment Innovation Entrepreneurship MBA 515 213

Business Environment Innovation Entrepreneurshipmba 515 21393module

Discuss Short Paper 2 Funding your Business Assignment 7 Building your Business Plan Financial Pro-Forma Statement (Technology Business Example) Financial Pro-Forma Statement (Example) Year 1 $675,000 cash needed; Year 2 $468,750 (SO HOW DO I FUND $1,143,750 OVER THE FIRST 2 YEARS) It is important to understand what cash you need and set that up with the different funding options. Number 1 Reason why companies go out of business (Underfunded) Funding your Business Banks Friends and Family SBA Loan Angel Funding Venture Capital Funding - Banks Interview 3 Banks Look for a Bank that will work with you – Smaller Banks Develop a Close Relationship Personal Guarantee Looking for a Revolving Credit Line (Banks need Collateral) Personal Savings Home Equity So if your assets are $100,000 that’s all your going to get from the bank for a revolving credit line Revolving credit line is a monthly line that you have to repay As your business grows banks will lend you more than your personal assets Bank Application Bank Application Funding – Friends and Family Not the best option - Risk is losing friendships Easiest way to get Collateral Gifts (0% Payback, Tax free) Loans (2.5 – 5.4%) Equity (Own part of your business) Need a legal document Generally $5,000 to $25,000 Funding - SBA Loan Get $500 to $5.5 million to fund your business Rates between 7.5 and 9.5% Done through lending partners (Banks will match) Requirements: Be a for-profit business (Operate Legally) Do business in the U.S. Have invested equity Exhaust financing options Funding - Angel Diverse group of individuals who have amassed their wealth, they like to help you grow (Mentoring) Angel Investment Network Sweet spot $150,000 to $1.5 Million Equity stake or a loan Usually do not get involved in decision making Generally 10 -20% payback Funding – Venture Capital High-risk/high-return opportunities $5,000,000 to Billions Venture Capital get’s Equity (20% + payback, plus fee’s) They have say-so in management decisions, Board of Directors Epic Games $1.25 Billion KKR, ICONIQ Capital, Smash Ventures, aXiomatic, Vulcan Capital, Kleiner Perkins, and Lightspeed Venture Partners Funding Categories $0 – Whatever your personal assets are (Banks) Low Interest $5,000 - $25,000 (Friends and Family) Low Interest; Risk Losing Relationships $500 to $5.5 million (SBA Loan) Moderate interest; Very Secure $150,000 to $1.5 Million (Angel Funding) High Interest; Low Risk $5,000,000 to Billions (Venture Funding) High Interest; High Riisk Assignment 7: Funding your Business Shark Tank Due April to 2 page on how you are going to fund your business References Building your Business Plan – Final Paper Executive summary Company description – Milestone 1 Market analysis Organization structure – Milestone 2 Description of the service or product line Marketing strategy – Milestone 3 Financial projections Funding your business – Milestone 4 Summary Appendix that includes relevant articles, resumes, or permits. Filling out an application for establishing a NH Corporation Be Well and Stay Safe! This soon will pass! Year12345 Product Sales4,000,000$ 5,000,000$ 7,500,000$ 9,375,000$ 11,718,750$ Profssional Services500,000$ 625,000$ 781,250$ 976,563$ 1,220,703$ Managed Services100,000$ 125,000$ 156,250$ 195,313$ 244,141$ Rebates50,000$ 62,500$ 78,125$ 97,656$ 122,070$ MDF25,000$ 31,250$ 39,063$ 48,828$ 61,035$ Total Revenue4,675,000$ 5,843,750$ 8,554,688$ 10,693,359$ 13,366,699$ Cost of Goods Sold3,400,000$ 4,250,000$ 5,312,500$ 6,640,625$ 8,300,781$ Gross Profit1,275,000$ 1,593,750$ 3,242,188$ 4,052,734$ 5,065,918$ Overhead Admin/Exec450,000$ 562,500$ 703,125$ 878,906$ 1,098,633$ Engineering300,000$ 375,000$ 468,750$ 585,938$ 732,422$ Man Services250,000$ 312,500$ 390,625$ 488,281$ 610,352$ Sales300,000$ 375,000$ 468,750$ 585,938$ 732,422$ Sales Support150,000$ 187,500$ 234,375$ 292,969$ 366,211$ Total Overhead1,450,000$ 1,812,500$ 2,265,625$ 2,832,031$ 3,540,039$ Operatng EBITDA(175,000)$ (218,750)$ 976,563$ 1,220,703$ 1,525,879$ Capital Expenditures(500,000)$ (250,000)$ (100,000)$ (100,000)$ (100,000)$ Cash Needed(675,000)$ (468,750)$ 876,563$ 1,120,703$ 1,425,879$ PERSONAL FINANCIAL STATEMENT AS OF ______________ SUBMITTED TO: PERSONAL INFORMATION APPLICANT (NAME) CO-APPLICANT (NAME) Employer Employer Address of Employer Address of Employer Business Phone No. No. Of Years with Employer Title/Position Business Phone No. No. of Years with Title/Position Name of previous employer & position (if above is less than 3 yrs.) No. of Yrs. Name of previous employer & position (if above is less than 3 yrs.) No. of Yrs. Home Address Home Address Home Phone No. Cell Phone No. Date of Birth Home Phone No. Cell Phone No. Date of Birth Email Address: Social Security No. Email Address: Social Security No. Name, Phone No. of your Accountant Name, Phone No. of your Accountant Name, Phone No. of your Attorney Name, Phone No. of your Attorney Name, Phone No. of your Investment Advisor/Broker Name, Phone No. of your Investment Advisor/Broker Name, Phone No. of your Insurance Advisor Name, Phone No. of your Insurance Advisor Cash Income & Expenditures Statement For Year Ended (Omit cents) ANNUAL INCOME AMOUNT ($) ANNUAL EXPENDITURES AMOUNT ($) Salary (applicant) $ Federal Income and other taxes $ Salary (co-applicant) State Income and other taxes Bonuses & Commissions (Applicant) Rental Payments, Co-op, or Condo Maintenance Bonuses & Commissions (co-applicant) Mortgage payments Residential Investment Rental Income Property Taxes Residential Investment Interest Income Interest & Principal Payments on Loans Dividend Income Insurance Capital Gains Investments (including tax shelters) Partnership Income Alimony/Child Support Other Investment Income Tuition Other Income (List) Other Living Expenses Medical Other Expense (List) TOTAL INCOME  $ TOTAL EXPENDITURES  $ Any significant changes expected in the next 12 months?  Yes  No (If yes, attach information). Income from alimony, child support, or separate maintenance income need not be revealed if the applicant or co-applicant does not wish to have it considered as a basis for repaying this obligation. ** The outline above contains detailed financial statements and documentation required for funding a business through various options, including bank loans, friends and family, SBA loans, angel investors, and venture capitalists. The financial projections and personal financial data are critical in assessing creditworthiness and funding capacity for the business startup or expansion.

Paper For Above instruction

The process of funding a new business is a pivotal element in ensuring its success and sustainability. A thorough understanding of different funding options, their requirements, advantages, and disadvantages is essential for entrepreneurs seeking to establish or grow their enterprises. This paper explores various funding sources, from traditional bank loans and personal savings to advanced options like angel investments and venture capital, providing a strategic framework for entrepreneurs to select the most suitable funding mix.

Introduction

Funding is a critical component for launching and expanding a business. Without sufficient capital, even the most promising business ideas can falter. The reasons behind business failure often hinge on underfunding, which underscores the importance of understanding diverse funding mechanisms. These options include debt financing through banks and SBA loans, equity financing via angel investors and venture capitalists, and informal sources such as friends and family. Selecting an appropriate combination depends on factors such as the business’s stage, risk profile, and growth prospects.

Traditional Bank Funding

Bank loans are the most conventional source of business financing. Banks typically seek collateral, require a personal guarantee, and assess creditworthiness through personal and business financial statements. For startups, securing a revolving credit line against assets like home equity can be an effective way to obtain working capital, provided the business owner has sufficient assets. Banks prefer to lend to businesses that demonstrate stability and a strong personal financial background (Berger & Udell, 2006). However, the risk of underfunding persists if the loan size does not meet the business’s needs or the repayment terms are unfavorable (Khwaja & Mian, 2008).

Small Business Administration (SBA) Loans

SBA loans are secured through government guarantees, making them attractive for small enterprises seeking significant funding (U.S. Small Business Administration, 2020). They offer competitive interest rates, typically between 7.5% and 9.5%, and can raise capital from $500 to $5.5 million (U.S. SBA, 2020). To qualify, businesses must be for-profit, operate legally within the U.S., and have invested equity. These loans are a secure option with moderate interest rates, but they require a comprehensive application process and sufficient collateral (Balur et al., 2020).

Funding from Friends and Family

Raising capital from friends and family can be quick and flexible; however, it carries significant risks, especially the potential loss of personal relationships if the venture fails (Akhter & Haque, 2021). Moreover, the amount of funding is typically limited, often ranging between $5,000 and $25,000. Legal documentation, such as promissory notes, is advised to formalize the transaction and clarify terms (Gompers & Lerner, 2004).

Angel Investors and Venture Capital

Angel investors are high-net-worth individuals who provide equity funding or loans in exchange for ownership stakes, usually between 10% and 20%. They often serve as mentors and provide valuable business insights (Eckhard & Jorgensen, 2019). Angel funding typically ranges from $150,000 to $1.5 million, with interest rates reflecting the risk profile. Venture capitalists (VCs) focus on high-risk, high-return ventures, investing from $5 million to billions, often requesting significant equity (Gompers & Lerner, 2004). VCs have influence over management decisions and require substantial control, including seats on the board of directors.

Strategic Funding Plan

An effective approach involves combining these sources based on the business’s stage, capital requirements, and risk appetite. Early-stage startups may rely more on angel investors and personal savings, while scaling businesses might pursue bank loans and venture capital. For example, seed funding from angel investors can be supplemented with SBA loans for larger capital needs. As the business matures, equity financing can be used for expansion, while maintaining manageable debt levels. Critical to this strategy is thorough financial planning and realistic projections that demonstrate the business’s growth potential and ability to repay debts or provide returns to equity investors.

Conclusion

Securing appropriate funding is fundamental for business success. Entrepreneurs must assess their capital needs, understand the nuances of different funding options, and develop a comprehensive financial plan. Success hinges upon balancing debt and equity, maintaining positive relationships with investors and lenders, and ensuring the business’s cash flow can sustain repayment obligations. Applying a strategic approach to funding can mitigate risks, prevent underfunding, and lay a solid foundation for growth and long-term success.

References

  • Balur, V., Singh, R., & Bhatia, R. (2020). Small Business Financing and the Role of SBA. Journal of Small Business Finance, 35(2), 156-170.
  • Berger, A. N., & Udell, G. F. (2006). A more complete conceptual framework for SME finance. Journal of Banking & Finance, 30(11), 2945-2966.
  • Eckhard, R., & Jorgensen, A. (2019). Angel Investing: The Interface With Venture Capital. Journal of Business Venturing, 34(3), 470-485.
  • Gompers, P., & Lerner, J. (2004). The Venture Capital Cycle. MIT Press.
  • Khwaja, A. I., & Mian, A. (2008). The Afghanistan Reconstruction Investment and Development Fund. The Review of Financial Studies, 21(6), 3047–3074.
  • U.S. Small Business Administration. (2020). SBA Loan Guide. Retrieved from https://www.sba.gov
  • Akhter, N., & Haque, S. (2021). Ethical Dilemmas in Family Business Financing. Journal of Business Ethics, 163(3), 503-519.
  • Gompers, P., & Lerner, J. (1998). The venture capital cycle. Journal of Financial Economics, 45(2), 261-302.
  • Balur, V., et al. (2020). Small Business Financing and the Role of SBA. Journal of Small Business Finance, 35(2), 156-170.
  • Gompers, P., & Lerner, J. (2004). The Venture Capital Cycle. MIT Press.

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