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CHAPTER OUTLINE AND TEACHING NOTES
B. TRADE CREDIT is extended by vendors
on purchases of inventory, equipment,
and/or supplies.
C. In CONSIGNMENT SELLING, payments
D. Seller Financing includes a Promissory
Note with interest rate, repayment details,
and default consequences.
1. Buyer advantage is faster and
E. Commercial and Other Financial
Institutions
1. The cost of financing through
Traditional financial institutions is
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CHAPTER OUTLINE AND TEACHING NOTES
a. Ninety percent of small busi-
nesses identify their local bank
as their primary financial institu-
tion.
d. The business is usually required
to pay up all unsecured debts for
a short period each year to prove
its credit worthiness.
3. Credit cards are being used more fre-
quently by small companies to fi-
nance operations.
4. Insurance companies may be good
E. Small Business Administration (SBA)
1. One of the main purposes of the SBA
is to help small firms find financing.
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CHAPTER OUTLINE AND TEACHING NOTES
a. The SBA offers guarantees on
loans made by private lenders
2. Guaranteed loans
a. The SBA guarantees 30-40% of
long-term loans to small busi-
nesses under its 7(a) program to:
(1) purchase land, buildings, or
b. To qualify, the business must be
unable to obtain reasonable pri-
vate financing and must meet
certain size standards.
c. A bank actually extends a loan to
a small firm, with the SBA guar-
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CHAPTER OUTLINE AND TEACHING NOTES
(1) For existing businesses, a
f. The SBA looks for:
(1) Management ability and ex-
3. Specialized programs
a. Specialized financing is available
to small disadvantaged business
subcontractors.
(1) The business must be at
b. The SBA Low Documentation
(Low Doc) Loan Program can be
used for loans of less than
$100,000.
c. The CAP Line Revolving Line of
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CHAPTER OUTLINE AND TEACHING NOTES
d. The “Women’s Prequalification
F. Small Business Investment Companies
(SBICs)
1. The SBA matches each dollar an
SBIC puts into a loan.
G. U.S. Department of Agriculture (USDA)
1. A U.S. Department of Agriculture pro-
gram encourages businesses to
come up with innovative products.
REAL WORLD EXAMPLE 7.4
USDA provided financing for one young entrepreneur’s
2. A GREEN PRODUCT is an environ-
mentally friendly product for sale com-
mercially.
3. A Green Business can be:
a. A business offering green prod-
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CHAPTER OUTLINE AND TEACHING NOTES
Carbon Footprint (The total set of
greenhouse emissions caused by
VI. WHAT LENDERS LOOK FOR
Learning Objective 7.
Explain what a lender looks for in a borrower.
A. If the loan is for a new business, the
lender wants to see if you can live within
the income of the business.
1. Given your expected revenues and
B. If the loan is for an existing business, the
lender will look at its track record.
1. Are there problems?
2. What will you do different in the fu-
ture?
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CHAPTER OUTLINE AND TEACHING NOTES
C. To a large extent, your ability to attract
money will depend on:
1. The lender’s perception of your char–
D. Your request for financing will be checked
by a major credit company using comput-
erized reference services.
1. Before applying for funds, get a copy of
LEARNING OBJECTIVES REVISITED
1. Explain the importance of proper financing for a small business.
● Providing for financial needs is crucial for a small business, which may be undercapital-
ized.
2. Tell how to estimate financial needs, and explain some principles to follow in obtaining
financing.
● Long-term assets should be financed with equity or with debt funds having a maturity equal
to the productive life of the asset.
7–24
3. Explain why equity and debt financing are used, and describe the role each plays in the
capital structure of a small firm.
● Equity is an owner’s share of the assets of a company.
○ Equity financing never has to be repaid and provides an interest in the business.
4. Distinguish the types of equity and debt securities.
● Equity securities represent an ownership interest.
○ Common stock
○ Preferred stock
5. Describe some sources of equity financing.
● Owner
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6. Describe some sources of debt financing.
● Trade credit
● Commercial banks and other financial institutions
○ Line of credit
7. Explain what a lender looks for in a borrower.
KEY TERMS USED IN THIS CHAPTER
Angel capitalists, or business angels, are wealthy local business people and other investors who may be
external sources of equity funding.
Asset-based financing accepts as collateral the assets of a firm in exchange for the loan.
Barter consists of two or more companies exchanging items of roughly equal value.
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Common stockholders are the real stock holders of a corporation, and their financial claim is to the profit
leftover after all other claims against the business have been met. Because they almost always re-
tain the right to vote for company directors and/or other important issues, common stockholders
exercise effective control of the management of the firm.
With Consignment selling, payments to suppliers are made only when the products are sold, rather than
when they are received in stock.
Debt financing comes from lenders, who will be repaid at a specific interest rate within a specified period
of time.
Intermediate-term securities mature in one to five years.
A lease is a contract that permits use of someone else’s property for a specified time period.
A line of credit permits a business to borrow up to a set amount without red tape.
Long-term securities mature after five years or longer.
A mortgage loan is long-term debt secured by real property.
Stock represents ownership in a corporation.
Trade credit is extended by vendors on purchases of inventory, equipment, and/or supplies.
Venture capital (VC) firms make investments based on projected future income and generally require a
substantial return as either equity or profit.
Working capital is current assets, less current liabilities, that a firm uses to produce goods and services,
and to finance the extension of credit to customers.
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NOTES FOR DISCUSSION QUESTIONS
1. Discuss the basic rules to follow in financing a business venture.
One should look at the capital requirements necessary to finance the venture. Assets of a business
2. Why should small business managers assess working capital needs in advance?
3. What are some of the reasons small business entrepreneurs use equity financing? Debt financing?
Reasons for using equity include:
(1) Equity is a buffer set up for the protection of creditors.
4. What are the factors that determine the classification of debt securities?
Debt securities may be classified by maturity and by security.
5. List and discuss the primary sources of equity financing.
Some important sources include:
(1) Self. This is especially important because creditors usually want to see the entrepreneur’s
personal wealth committed to the venture so that it will be impossible for him or her to
simply give up.
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6. List and discuss the primary sources of debt financing.
(1) Trade credit is extended by vendors on purchases of inventory, equipment, and supplies.
This is one of the most important sources of financing because it arises spontaneously in
(4) Seller-Financing includes a Promissory Note, rate of interest, repayment schedule and de-
fault terms. However, interest may be above market rates. Buyer advantage would be faster
and cheaper closing, and a more flexible contract
(5) Small Business Administration. One of the purposes of the SBA is to help small firms find
7. Compare equity financing to debt financing.
Equity financing does not have to be repaid as debt financing does. On the other hand, it conveys
8. Evaluate the role of the SBA in providing operating and venture capital.
The SBA was designed to assist small businesses. It tends to permit longer periods of repayment
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NOTES FOR CASE QUESTIONS
CASE 7.1: Ella Williams: Making It on Her Own
1. What kind of financing did Williams use to start her business?
2. How could SCORE have helped?
The SBA-sponsored SCORE is the Service Corps of Retired Executives. These former business
3. Do you think that this cycle of “uphill battle” is typical for minority-owned businesses?
CASE 7.2: Karen T. La Beau
1. What is the first thing Karen needs to prepare before she applies for a loan?
Karen’s first task should be to prepare a business plan for her venture. The research required to
2. What are other financing options?
In addition to her own equity, Karen can consider approaching a Small Business Investment
3. Should Karen consider an incubator? Why or why not?
BONUS EXERCISES
7.1 Financing Options
This exercise asks students to consider the financing options for financing a firm’s expansion.
Use Handout 7-A: Financing Options on the following page for this exercise.
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HANDOUT 7-A
Financing Options
You’ve owned a tool and die company for the last five years. Even during the recession, you have
been earning a net profit of 30% on your investment and have been able to pay yourself a reasonable sal-
ary. You are feeling so confident that you are considering expanding. You believe that your profit poten-
tial can improve greatly if you could expand your product line with newer high-tech equipment. You esti-
mate that you will need $1,000,000 for the expansion.
1. What are your financing alternatives?
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HANDOUT 7-B A GREEN BUSINESS
Did you grow up on a farm? Do you want to be the supplier for a green restaurant?
Either way, organic farming is a fast-growing industry to those who prefer not to have
GMO (Genetically Modified) and altered foods, or imbibe chemicals.
Organic farms are basically like Grandpa’s Farm; He did not use harsh chemicals.
For dairy farms and organic milk, cows are fed grass and hay, no chemicals added.
This is the milk your grandparents drank and made buttermilk and fresh butter from.
These are organic products.
As great as this sounds, it is not always a good thing. More farms and inspectors are