Personal Assets Its owners are the most important source of funds for any new

Personal assets its owners are the most important

This preview shows page 27 - 29 out of 62 pages.

Personal Assets Its owners are the most important source of funds for any new business. Figuring that owners with substantial investments will work harder to make the enterprise succeed, lenders expect owners to put up a substantial amount of the start-up money. Where does this money come from? Usually through personal savings, credit cards, home mortgages, or the sale of personal assets. Loans from Family and Friends For many entrepreneurs, the next stop is family and friends. If you have an idea with commercial potential, you might be able to get family members and friends either to invest in it (as part owners) or to lend you some money. Remember that family and friends are like any other creditors: they expect to be repaid, and they expect to earn interest. Even when you’re borrowing from family members or friends, you should draw up a formal loan agreement stating when the loan will be repaid and specifying the interest rate. Chapter 13 Managing Financial Resources 13.4 The Role of the Financial Manager 710
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Bank Loans The 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 that your idea is commercially feasible. They also prefer you to have some combination of talent and experience to run the company successfully. Bankers want to see a well-developed business plan, with detailed financial projections demonstrating your ability to repay loans. Financial institutions offer various types of loans with different payback periods. Most, however, have a few common characteristics. Maturity The period for which a bank loan is issued is called its maturity 24 . A short-term loan 25 is for less than a year, an intermediate loan 26 for one to five years, and a long-term loan 27 for five years or more. Banks can also issue lines of credit 28 that allow you to borrow up to a specified amount as the need arises (it’s a lot like the limit 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’d request a five-year loan. On the other hand, if you’re financing a piece of equipment that you’ll use for ten years, you’ll want a ten-year loan. For short-term needs, like buying inventory, you may request a one-year loan. With any loan, however, you must consider the ability of the business to repay it. If you expect to lose money for the first year, you obviously won’t be able to repay a one-year loan on time. You’d be better off with intermediate or long-term financing. Finally, you need to consider amortization 29 —the schedule by which you’ll reduce the balance of your debt. Will you be making periodic payments on both principal and interest over the life of the loan (for example, monthly or quarterly), or will the entire amount (including interest) be due at the end of the loan period?
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