copyright © 2009 pearson education canada4-1 chapter 4 starting and financing a small business

Copyright © 2009 Pearson Education Canada 4-1

Chapter 4Chapter 4

Starting and Starting and Financing a Financing a

Small BusinessSmall Business


Economic Roles of Small Economic Roles of Small BusinessBusiness

Provide new jobs

Introduce new products

Service large corporations

Engage in specialization


CHARACTERISTICS OFCHARACTERISTICS OF SMALL BUSINESS SMALL BUSINESS

• Independently owned and operated

• Not dominate in its field

• Relatively small annual sales

• Fewer than 500 employees

• Limited resources, but tend to be innovative


Types of Small BusinessTypes of Small Business

LifestyleLifestyle High-GrowthHigh-Growth

Run by individualsRun by individuals

Limited products/servicesLimited products/services

Limited resourcesLimited resources

Limited marketplaceLimited marketplace

Run by teamsRun by teams

Multiple products/servicesMultiple products/services

Investment capitalInvestment capital

Large marketplaceLarge marketplace


Innovation Innovation in Small Businessin Small Business

Faster decisionsFaster decisions

Access to ownersAccess to owners

Individual expressionIndividual expression


How Entrepreneurs Spend Their How Entrepreneurs Spend Their TimeTime

How Entrepreneurs Spend Their How Entrepreneurs Spend Their TimeTime

0% 5% 10% 15% 20% 25% 30%

Other Services

Planning Growth/Change

Arranging Financial Matters

Dealing With Suppliers

Maintenance

Production

Direct Selling

Keeping Records

Dealing With Employees


Factors Contributing to Factors Contributing to Small Business GrowthSmall Business Growth

Technology and the Internet

Women and minorities

Downsizingand outsourcing


Women Starting BusinessesWomen Starting Businesses

0% 10% 20% 30% 40% 50%

Reenter Workforce

Born Entrepreneur

Family Event

Fell Into It

Downsized

Bored in Job

Glass Ceiling

Entrepreneurial Idea


Characteristics of Characteristics of EntrepreneursEntrepreneurs

• Highly disciplined

• Like to control their destiny

• Listen to their intuition

• Relate well with others

• Eager to acquire new skills

• Learn from their mistakes


Characteristics of Characteristics of EntrepreneursEntrepreneurs

• Stay abreast of market changes

• Willing to exploit new opportunities

• Driven by ambition

• Think positively

• Prefer risk taking over security


Preparing a Business Preparing a Business PlanPlan

Summarize the business

Communicate goals

Highlight plans

Show customer benefits


Importance Importance of a Business Planof a Business Plan

Guides companyGuides companyoperationsoperations

Outlines strategyOutlines strategy

Attracts lendersAttracts lendersand investorsand investors


Starting a New BusinessStarting a New Business

+ Control your destiny

+ Reach your potential

+ Unlimited profits

+ Recognition

+ Doing what you enjoy

– Uncertain income

– Risk of loss

– Long hours & hard work

– Total responsibility

– High stress levels

Advantages Disadvantages


Buying an Existing Buying an Existing BusinessBusiness

+ Customer base

+ Business systems

+ Product or service

+ Location

+ Financing

– May be overpriced

– Alienated customers

– Obsolescence

– Location

– Personality clashes

– Outstanding receivables

Advantages Disadvantages


The Franchise The Franchise

AlternativeAlternative

Franchisee Franchisor

Types

Product Manufacturing Business-format


How to Evaluate a How to Evaluate a

FranchiseFranchise• What does the initial franchise fee cover?• How are periodic royalties calculated and

when are they paid?• Are all trademarks and names legally

protected?• Who provides and pays for advertising

and promotion?• Who selects the location of the business?


How to Evaluate a How to Evaluate a

FranchiseFranchise• Is the franchise assigned an exclusive

territory?• Does the franchisee have the right of first

refusal on additional nearby franchises?• Is the franchisee required to purchase

equipment and supplies from the franchisor?

• How can the franchise agreement be terminated?

• Can the franchise be assigned to heirs?


The Pros and Cons of The Pros and Cons of FranchisingFranchising

Advantages

Get a viable business

Instant name recognition

Built-in support group

Marketing & advertising

Disadvantages

No guarantee of success

Expensive to obtain

High monthly royalties

Limited independence


Why New Businesses FailWhy New Businesses Fail

Management incompetenceManagement incompetence

Lack of industry experienceLack of industry experience

Inadequate financingInadequate financing

Poor business planningPoor business planning

Unrealistic goalsUnrealistic goals

Diminished customer baseDiminished customer base

Uncontrolled growthUncontrolled growth

Inappropriate locationInappropriate location

Poor system of controlsPoor system of controls

Lack of entrepreneurial skillsLack of entrepreneurial skills


TheTheInternetInternet

IncubatorsIncubatorsBDCBDC

Sources of Small Sources of Small Business AssistanceBusiness Assistance


Length of TermLength of Term

Short-TermShort-Term Long-Term Long-Term

Meet financial Meet financial obligationsobligations

Meet financial Meet financial obligationsobligations

Acquire buildings Acquire buildings and equipmentand equipment

Acquire buildings Acquire buildings and equipmentand equipment

Start-up or expandStart-up or expandoperationsoperations

Start-up or expandStart-up or expandoperationsoperations

Maintain liquidityMaintain liquidityMaintain liquidityMaintain liquidity


The Cost of CapitalThe Cost of Capital

Risk factorsRisk factors

Interest ratesInterest rates

Funding vehiclesFunding vehicles


Obtaining CapitalObtaining Capital

Debt FinancingDebt Financing Equity Financing Equity Financing

Unsecured loansUnsecured loansUnsecured loansUnsecured loans

StockStockStockStock

Initial PublicInitial PublicOffering (IPO)Offering (IPO)Initial PublicInitial Public

Offering (IPO)Offering (IPO)

Secured loansSecured loansSecured loansSecured loans


Debt Versus EquityDebt Versus Equity

FinancingFinancingCharacteristicCharacteristic DebtDebt EquityEquity

MaturityMaturity

Claim on incomeClaim on income

Claim on assetsClaim on assets

Influence overInfluence overmanagementmanagement

SpecificSpecific

Fixed costFixed cost

PriorityPriority

LittleLittle

Non-specificNon-specific

Discretionary costDiscretionary cost

ResidualResidual

VariesVaries


CorporateCorporatefinancingfinancingCorporateCorporatefinancingfinancing

PersonalPersonalAssetsAssets

PersonalPersonalAssetsAssets

CreditCreditcardscardsCreditCreditcardscards

VentureVenturecapitalistscapitalistsVentureVenture

capitalistscapitalists

BankBankloansloansBankBankloansloans

Private SourcesPrivate Sourcesof Financingof Financing

Private SourcesPrivate Sourcesof Financingof Financing

FriendsFriendsFriendsFriends

AngelAngelinvestorsinvestors

AngelAngelinvestorsinvestors


Financing A New Financing A New

BusinessBusiness

• Length of term

• Cost of capital

• Debt vs. equity

• Financing sources

copyright © 2009 pearson education canada4-1 chapter 4 starting and financing a small business

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