Personal AssetsIts owners are the most important source of funds for any new business. Figuringthat owners with substantial investments will work harder to make the enterprisesucceed, lenders expect owners to put up a substantial amount of the start-upmoney. Where does this money come from? Usually through personal savings,credit cards, home mortgages, or the sale of personal assets.Loans from Family and FriendsFor many entrepreneurs, the next stop is family and friends. If you have an ideawith commercial potential, you might be able to get family members and friendseither to invest in it (as part owners) or to lend you some money. Remember thatfamily and friends are like any other creditors: they expect to be repaid, and theyexpect to earn interest. Even when you’re borrowing from family members orfriends, you should draw up a formal loan agreement stating when the loan will berepaid and specifying the interest rate.Chapter 13 Managing Financial Resources13.4 The Role of the Financial Manager710
Bank LoansThe financing package for a start-up company will probably include bank loans.Banks, however, will lend you some start-up money only if they’re convinced thatyour idea is commercially feasible. They also prefer you to have some combinationof talent and experience to run the company successfully. Bankers want to see awell-developed business plan, with detailed financial projections demonstratingyour ability to repay loans. Financial institutions offer various types of loans withdifferent payback periods. Most, however, have a few common characteristics.MaturityThe period for which a bank loan is issued is called itsmaturity24. Ashort-termloan25is for less than a year, anintermediate loan26for one to five years, and along-term loan27for five years or more. Banks can also issuelines of credit28thatallow you to borrow up to a specified amount as the need arises (it’s a lot like thelimit on your credit card).In taking out a loan, you want to match its term with its purpose. If, for example,you’re borrowing money to buy a truck that you plan to use for five years, you’drequest a five-year loan. On the other hand, if you’re financing a piece of equipmentthat you’ll use for ten years, you’ll want a ten-year loan. For short-term needs, likebuying inventory, you may request a one-year loan.With any loan, however, you must consider the ability of the business to repay it. Ifyou expect to lose money for the first year, you obviously won’t be able to repay aone-year loan on time. You’d be better off with intermediate or long-termfinancing. Finally, you need to consideramortization29—the schedule by whichyou’ll reduce the balance of your debt. Will you be making periodic payments onboth principal and interest over the life of the loan (for example, monthly orquarterly), or will the entire amount (including interest) be due at the end of theloan period?