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Brian Ghilliotti

BES 218
Week 12
25 Key Points of Financing of Interest
November 21st, 2016

1) Lenders use 5 standards of determining credit worthiness:

Capacity ability to repay the loan
Capital net worth of the business.
Collateral personal assets of the borrower.
Character past history or willingness to repay.
Conditions - current economic climate.

2) Lending officers look for additional criteria beyond the Five Cs evaluating your loan
Experienced management Are you experienced in the business and industry?
Commitment - Are you willing to make a substantial investment of time and money?
Adequate cash flow - With the loan, will the business generate enough dollars to pay off the loan
and then some?

3) The entrepreneur should obtain a copy of her or his credit report before the lender does.
Personal credit reports may contain errors or be out of date; many times people find that
they have paid a debt but that it has not been recorded on the report.
4) The entrepreneur will need funds for short-term assets, long-term assets, initial start-up
costs and working capital for the business until the business generates enough income to
support the expenses.
5) Short-term assets can be converted to cash easily within a short period of time. They
include cash, accounts receivable, inventory, and prepaid expenses.
6) Long-term assets usually cannot be converted easily into cash within one year. The most
common long-term assets are buildings and equipment, land, leasehold improvements,
and patents.
7) A realistic startup budget should only include those things that are necessary to start that
business. These essential expenses can then be divided into two separate categories: fixed
expenses (or overhead) and variable expenses (those related to producing sales for the
business). Fixed expenses will include things like the monthly rent, utilities, administrative
costs, and insurance costs. Variable expenses include inventory, shipping and packaging
costs, sales commissions, and other costs associated with the direct sale of a product or

8) Unfortunately, banks usually end up far down on the list of most likely sources of start-up
funding. Instead, most small businesses are financed through private funding and other
sources. Some of these sources include:

Personal savings

Loan from family or friends (OPM-Other Peoples Money)

Personal bank loan

Refinancing or a second mortgage on real estate or other assets

Cash value of assets you could sell

Cash value of life insurance, stocks or bonds

Credit cards

Investments from partners

Advance payments from contracts (not a likely source)

Credit from suppliers (trade credit)

9) Two main categories of funds potentially available to the entrepreneur are debt and equity.
Debt funds (also known as liabilities) are borrowed from a creditor, and need to be repaid,
usually on a specific payment schedule. Equity funds are supplied by investors in
exchange for an ownership in the business. They needs not be repaid, but expect some
type of return from the venture or a buyout at a certain time.
10) Equity capital, also referred to as owner capital, is the money invested in a business by
the owner/entrepreneur or owners. This might include the entrepreneurs personal
savings, investments, life insurance policies, securities, etc. The most common sources of
equity financing are personal funds, family and friends. The next source usually tapped is
private investors, typically people the entrepreneur knows or has met through business
11) Venture Capitals usually refer to a corporation or partnership that operates as an
investment group. These investors generally try to limit the length of their investment to
between five and seven years before they are able to cash out.
12) Small Business Investment Companies are privately owned banks, regulated by the SBA
that supply capital to small businesses. They either directly purchase a small businesss
stock, or purchase the companys certificates of debt, which may be converted into stocks.
13) An angel is a wealthy, experienced individual who has a desire to assist startup or
emerging businesses.
14) IPOs are initial public offerings, which mean the sale of stock to the general public. These
sales always are governed by the Securities and Exchange Commission (SEC).
15) Debt capital is borrowed money. Sources for debt capital (loans) might include friends
and relatives, supply vendors, equipment vendors, state and/or local business
development funds. Most entrepreneurs think of commercial banks when it comes to
borrowing; however, there are many alternative sources. Savings and loans institutions,
trade credits, leasing arrangements (equipment vendors often allow entrepreneurs to
lease equipment or buy it on credit), and personal credit cards are other examples.

16) Commercial banks generally provide financing at comparatively low rates but in return
expect a strict repayment schedule and detailed recordkeeping.

Secured loan a loan that requires collateral as security for the


Unsecured loan a short-term loan for which collateral is not


Line of credit an agreement that makes a specific amount of shortterm funding available to a business as it is needed.

Floor planning a type of business loan generally made for highpriced inventory items.

Installment loan generally for long-term assets with repayment

schedules equally the usable life of the asset.

Balloon note small payments to cover the interest over the life of
the loan, but the large lump-sum borrowed due at maturity.

Accounting is the system within a business to prepare and interpret reports based on the
data in the records.

18) In a double-entry accounting system every business transaction is recorded in an asset

account and a liability or owners equity account in order for the system to balance.
19) In a single-entry accounting system, you record the flow of income and expenses in a
running log, basically like a checkbook.
20) One decision you need to make in your accounting system is whether to use cash or
accrual accounting. The difference between the two is how each shows the timing of the
receipt of the money and the outlay of the money. Most businesses use the accrual basis
method of accounting in which income and expenses are recorded at the time they are
incurred, rather than when they are paid. With a cash basis method of accounting, income
and expenses are recorded at the time they are paid, rather than when they are incurred.
21) An income statement presents your actual business revenues (income) and expenses,
the difference between which is your company's net profit (or loss) over a specified period
of time.
22) A balance sheet provides a snapshot record, at a specific point in time, of everything
your business owns (assets), as well as what it owes (liabilities) and the owner's equity
(net worth). Assets include cash, inventory, accounts receivable, and fixed assets, such as
property, equipment, and vehicles. Liabilities include taxes owed, accounts payable,
mortgages, leases, bank loans, and loans from shareholders. This statement gives the
picture of the company's value. Here you can tell whether the company is heavily in debt
or if there is valuable property and or equipment owned by the business.
23) The cash flow analysis is extremely important. This statement shows how much money
(cash) you actually have. It shows how much cash is coming in the business and how
much is going out. It does not show profitability over time. The importance of tracking and
forecasting your cash flow cannot be understated, because it is often more critical to
survival of the business than profits.
24) Your break-even analysis allows you to calculate the amount of sales your business needs
to not lose money. Your business' break-even point is where total costs equal total
revenues, and it is an important calculation in order to determine the profitability of your

25) A ratio is simply a comparison or relationship of two numbers. Financial ratios are
calculations which compare important financial aspects of a business. There are four
important types of financial ratios which are liquidity, activity, leverage, and profitability
Material quoted from: