Transcript Document

Grow Your Business!
Find Ways to Improve
Cash Flow and Profits
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The SCORE Foundation
would like to thank
for showing their support of America’s small businesses
by sponsoring this series.
The content provided in the Grow Your Business! materials is intended as a
business resource only and does not guarantee a successful outcome when
applied to individual business use.
To find additional resources on growing your business,
visit www.score.org and www.openforum.com
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A Special Thanks to Our Local Sponsors
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Classroom Safety – Argosy U
Emergency
Exits
Restrooms
Please do
not wander
around the
building!
You are HERE
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Classroom Safety–ComCenter
Emergency
Exits
Restrooms
You are HERE
Please do
not wander
around the
building!
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About SCORE
• Successful and experienced business owners
and executives acting as volunteers
• Free ongoing mentoring:
One-on-one
E-mail
Signup on our website – Mentoring Tab
Douglas S. Cavanaugh
• Seminars and workshops
• Resources for small business:
manasota.score.org
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Assessing Your Business
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If you have not looked at the SCORE Business Needs
Assessment, it is in your packet!
It will help you assess the current state of your
business in 5 key areas:
1.Management
2.Marketing
3.Sales
4.Finance
5.Operations
Review with your mentor to help you:
Decide what additional workshops to attend
Develop a customized business improvement plan
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Workshops - Focused on key business processes
Improve performance to Grow Your Business!
Customers – Impacted by All Functions in Your Business
Marketing Essentials to Attract More Customers
Marketing
Sales
Focus on Customers to Increase Your Sales
Customer Service
Improve Your Services and
Gain Productivity
Service Delivery
Purchasing / Manufacturing
Find Ways to Improve Cash Flow and Profits
Distribution
Finance
Business Owners / Management - responsible for Business Performance
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Let’s Get Started
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Briefly tell us about you:
Katrina Markoff
• Your name
• Your business
(30 second “elevator” speech)
• Do you already have a SCORE mentor?
• What you hope to achieve during and
after this workshop
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During this workshop we will discuss:
Marta E. Maxwell
• Importance of financial management to a
small business owner
• Using Financial Statements
• Financial management practices, rules and
tools for a small business
• Funding: business growth, working capital,
and/or assets
• Common risks in a small business
• Business warning signs and risk management
plans
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Good Financial Management Practices
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Good Financial Management Practices
Reach YOUR goals by making good decisions
• Use commercial business accounting software
• Prepare a budget and measure performance
• Understand and manage your cash flow
• Keep track of profit /loss for your business
• Find appropriate funding for operations and growth
• Develop a business financial forecast – monthly, for the next 1
or 2 years
• Continue to improve measurements and practices
• Your accountant may help, but it is YOUR business!
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Importance of Excellent Bookkeeping
• Critical component of company financial management
• Organized process of tracking all income and expense
transactions
• Transaction entries must be current
• Basis for all financial management,
business decisions, financing, taxes,
owner’s draw / salary, and retirement
planning.
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Basic Bookkeeping Steps
1.
Obtain business accounting software
Discuss with your accountant:
– QuickBooks – Pro (Services) or Premier (Manufacturing)
– Peachtree Accounting
2.
3.
Open a separate business checking account
Deposit all sales receipts
–
–
4.
5.
6.
Checks / Cash
Credit card sales – direct deposit by clearing house
Write business checks for business expenses
Reconcile your checking account monthly
Obtain a separate business credit card
–
Pay bill monthly – credit card financing is expensive!
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Basic Bookkeeping Steps
7.
8.
9.
10.
Pay business expenses first
Track Sales – register tape / invoices
Pay yourself with owner’s draw / salary
Generate and use profit and loss (P&L) and cash flow
statements – at least monthly
Note: Most small businesses use the CASH method as their tax basis
and it shows the current cash status
The ACCRUAL method view shows additional “future”
information:
1- Sales that have been made, but payment has not been received
2 - Purchases that have been made, but the invoice is not yet paid.
Look at BOTH with your software to get the best perspective
on your financial status
10.
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Preparing a Budget
A budget is a tool that helps you:
• Plan for the future – usually monthly for the next year
• Forecast and then track your actual financial transactions
• Adjust activities when needed
• Marketing to attract more customers to increase sales
• Reducing costs
• Consider the impacts of
expansion
• Estimate profitability
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Primary Elements of a Budget
CATEGORY
MONTHLY BUDGET
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MONTHLY ACTUAL
SALES
COST OF GOODS SOLD
RENT/MORTGAGE
UTILITIES
PROFESSIONAL HELP
ADVERTISING
PAYROLL
INSURANCE/TAXES
OTHER
PROFIT
Your accounting software will provide detailed accounts for each category
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SCORE Budgeting / Forecast Template
• You may use a simple
format like the last slide
• SCORE also offers a
comprehensive
spreadsheet template for
developing your budget
or business financial
forecast
Download:
http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
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Exercise 1
How Do You Budget for Your Business?
Discussion:
1. Do you currently prepare an annual budget?
2. Do you track your results compared to budget
monthly?
3. How does this help with your business decisions /
forward plans?
5 minutes
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Understand and Manage Cash Flow
What is cash flow?
Moving cash in or out of a business including sales
revenue receipts and expense transactions
• Balance of cash received less the amount
of cash paid out over a period of time
• Cash flow can be positive or negative
during the period
•
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Cash Flow Analysis
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• Generate Cash Flow reports at least monthly with your
accounting software
• Compare your Actual business performance to your Budget in
all categories
– Where were the gaps?
– What impact did business performance have on Cash Flow?
– What needs to change to increase positive cash flow?
• Prepare a Cash Flow projection to help adjust performance
when needed
– Helps you manage your cash so you can pay your bills on a
timely basis and keep the doors of your business open
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Projecting / Estimating Future Cash Flow
Prepare a financial statement using assumptions to
forecast for a future time period:
•
•
•
•
Use your Budget estimates and adjust assumptions
based on current information
Current company cash flowing in and out
Future cash flow during a specific time period
Project whether cash receipts (in flows) will be
sufficient to cover projected cash disbursements
(out flows).
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Projecting / Estimating Future Cash Flow
How can a cash flow projection help?
• Set sales and expense goals
• Plan equipment purchases for replacement or expansion
• Determine cash needed to purchase inventory for seasonal
cycles
Why do I need a Cash Flow projection?
• Track liquidity when accrual accounting masks cash realities
• Help you determine the need for financing
• Show lenders your ability to plan and repay financing
(Frequently required with loan applications)
• Predict cash shortage period(s) that may require adjustments
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Cash Flow Projection Example
BT CONTEMPORARY CREATIONS, INC.
CASH FLOW STATEMENT
Sources of Cash
Operating Uses of Cash
Year ended
12/31/2010
Net income
21024
Cash flow from operating activities
Depreciation
Change in accounts receivable
Change in inventory
Change in accounts payable - trade
Change in accounts payable - other
Change in prepaid expenses
Change in accrued taxes
Total cash flow from operating activities
5237
-3747
-3302
2055
122
1124
249
1738
Cash flow from investing activities
Fixed asset purchases
Disposal of fixed assets
Total cash flow from investing activities
-21116
0
-21116
Non-Operating
Uses of Cash
Cash flow from financing activities
Retirement of long term debt
-5160
Change in cash
-3514
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Possible Ways to Increase Cash Flow
•
•
•
•
•
•
•
•
•
Increase the number of items sold
Increase the price
Reduce expenses
Change the timing of expenses
Obtain sources of cash other than sales (e.g., line of credit)
Reduce or change timing of Owner’s Draw
Buy inventory from vendor at lower price
Obtain credit from vendor(s)
Establish policy to get paid sooner by customers
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Exercise 2
How Do You Manage Cash Flow?
Discussion:
1.
2.
3.
4.
How many of you have had cash flow problems?
What were the causes?
What did you do?
Did it work?
5 minutes
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Cash Flow Projection - Worksheet
The SCORE Cash Flow
Projection spreadsheet can
be used to estimate weekly
cash flow.
Download at:
http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
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Profit and Loss Statement (P&L)
• Measures revenues and
expenses over a period
of time
• Tracks profitability: is the
business making a profit
on what it sells?
• Shows how successfully the buying and selling
process has been managed
• Measures the ability of your business to grow,
repay debt service and support you
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Profit and Loss Statement (P&L)
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Top section of the P&L shows Revenue
•
•
•
•
Gross revenue
(Plus or minus) Adjustments to revenue
(Minus) Cost of goods sold (COGS)
= Gross Profit
Bottom section of the P&L shows Expenses
• Logical categories of expenses, including overheads
Revenue minus Expenses = Net (pre-tax) Profit or Loss
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Profit and Loss Statement (P&L) Example
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P&L - Revenue / Gross Profit
Theresa Alfaro Daytner
(statements in your handouts)
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Profit and Loss Statement (P&L) Example
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P&L
Expenses
Net Income before
Taxes
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Net Profit is a GOAL!
Net profit pays for:
•
•
•
•
•
•
Loan principal repayment
Future income taxes
Owner’s Salary (LLC [S Corp] / Corporation)
Owners / Shareholders Dividends
Owners Draw (sole proprietor / partnership)
Future expansion and equipment
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Understanding and Using
Financial Ratios
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Understanding and Using Financial Ratios
Financial Ratios
•
•
•
•
•
Liquidity
Profitability
Leverage
Efficiency
Debt Service
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Can be compared to RMA
(Risk Management
Association) average ratios
Available for business types
by NAICS code (North
American Industry
Classification System)
Talk to your SCORE mentor to
obtain the RMA data for your
business type
Your mentor can help you determine
what ratios are appropriate for your business
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Liquidity Ratios
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Used to measure the quality and adequacy of
current assets to meet current obligations as
they come due
Surendra N. Kumar
• Current ratio – overall liquidity
– Current Assets / Current Liabilities
• Quick ratio – short term liquidity
– (Cash + AR) / Current Liabilities
• Days of cash
– (Cash x 360) / Sales
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Profitability Ratios
Elizabeth Feichter
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Used to measure performance of a company and
how well its assets are being used to generate
revenues
• Gross profit margin
• (Sales minus Cost of Good Sold) / Sales
• Pre-tax profit margin
• EBT / Sales
• Return on equity
• EAT / Equity
• Compare to historical & Industry
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Leverage Ratios
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Key measurements in determining a company’s
vulnerability to business downturns as well as its
capacity for credit and internal capital needs
• Debt to Equity - Leverage
• Liabilities / Equity
Andrew Dunn
• Compare to historical, or industry
averages and trends to assess your risks
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Efficiency Ratios
Marta E. Maxwell
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Measurements of the effectiveness of managing
current assets and current liabilities
• Days of accounts receivable (A/R)
• 360 /(Sales/Accounts Receivable)
• Days of inventory
• 360 /(Cost of Goods Sold/Inventory)
• Days of accounts payable (A/P)
• 360 /(Cost of Goods Sold/Accounts
Payable)
• Compare to terms, historical and industry
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Efficiency Ratios: Debt Service Ratios used by Banks
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Fixed Charge coverage and debt service coverage ratios used to
measure borrowing ability
• Earnings before Interest and Taxes (EBIT) / Interest
Generally 2.5 is the minimum credit standard
• Earnings Before Taxes / Current Maturities
Debt Service payment coverage from traditional cash flow:
= Earnings after taxes / current maturities
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Breakeven Analysis
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• Valuable for all businesses so you know how
much you need to sell to cover your total
costs!
• Breakeven when total costs
(fixed + variable) = total revenue
Paul Cernuto
• Breakeven = Fixed Cost/Gross Profit Margin
• Important calculation if you have high fixed
costs and variable sales
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Breakeven Chart
Simple Breakeven
Breakeven
- A Analysis
View of the Analysis
Sales revenue over time for
our example.
450000
400000
Breakeven - when total costs
(fixed + variable) = total
revenue
350000
Revenue ($)
300000
250000
200000
$20,000 sales
or 200 units
150000
100000
50000
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Units Sold (x100)
Revenue
Fixed Cost
Note: May be additional “Semi
Fixed Costs” influenced by
volume but not associated per
unit (example - commission
tiers, temporary labor, office
supplies)
Fixed + Variable
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Funding Business Growth
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Financing Growth – Part of Your Plan!
Sales growth may require:
Increased inventory
Larger space
More employees
Increased receivables
Consider financial impacts of funding growth
• Many companies in growth mode run short of $$ and fail
• Make sure you are adequately funded!
• Potential Source of funding
– Internal
– Bank / Lender
– Customer
– Vendor terms
– Crowd Funding
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Financing - Equity vs. Debt
• Debt Financing – a loan or line of credit that comes with a
repayment schedule and an interest rate.
– Upside: Don’t have to give up equity
– Downside: Must pay interest and may require personal
collateral such as home
• Equity Financing – funds received from private or "institutional"
investors in exchange for an equity ownership stake
– Upside: No loan payments to make
– Downside: You have new shareholders that may want a larger
role in managing the business (think “Shark Tank” TV show)
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Business Financing
• Working Capital
– Bank line of credit – borrow repeatedly up to a certain amount
Repay and re-borrow as required
– Extended Vendor payment terms – gives you more time to sell
product and get paid and pay vendors
• Equipment / Fixed Assets Financing
– Bank / Credit Union
– Collateral for a long term loan may be the assets you purchase
– SBA 504 Fixed Asset loans through financial institutions
– Commercial mortgage if you plan to buy, build or enlarge a building
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Managing Risk
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Types of Risk
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• Internal Risks
– Occur within the company
– May or may not be controllable by the company
– The company must respond to mitigate the risk
• External Risks
– Caused by events outside the company
– The company cannot control the events
– The company must respond to mitigate the risk
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Internal – Human Risks
• Death
– Owner / Key person
– Employee
• Illness
– Short term
– Long term
– Indefinite
• Employee Injuries
• Critical Employee(s) leave
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Internal – Human Risks
• Theft and fraud
– Product and inventory theft
– Time sheet fraud
– Accounting and cash fraud
• Low morale, dissatisfaction
– Failure to perform
– Sabotage of systems,
equipment or customers
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Internal – Equipment Risks
• Equipment breakdowns
– New equipment integration
– Inadequate maintenance
– Worn older equipment
– Damage to property / vehicles
– Failure cause by misuse
• Physical plant repairs
– Servicing lines or utilities
– Routine maintenance
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Internal – Information Technology Risks
•
•
•
•
•
•
•
•
•
Unplanned downtime
Lack of backup or recovery system
Updates and repairs
Power and connectivity
Outdated systems than cannot be repaired
Physical damage
Lack of administrative controls
Data theft
Problems with new software apps
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Internal – Financial Risks
• Cash flow changes
– Unexpected costs
– Loss of credit lines
– Customers fail to pay on time
– Expenses to establish lines of credit
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External – Competition and Market Risks
•
•
•
•
•
•
Loss of clients or customers
Loss of employees
Decrease in sales prices/fluctuating markets
Increases in vendor costs
Fuel / Energy price increases
Fixed cost changes (e.g., rent)
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External – Business Environment Risks
•
•
•
•
•
Laws
Weather
Natural Disaster
Community
Obsolescence
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External – Personnel Conflict Risks
Employees or Contractors:
• Family obligations, illnesses or deaths
• Events or disaster that affect the home
• Work / life balance
Owners:
• Community involvement distractions
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Risk Mitigation – Insurance Considerations
•
•
•
•
•
•
General liability
Property
Business interruption
Worker’s Comp
Key person life and health
Other
The costs need to be weighed against potential impact of risk
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Exercise 3 – Business Risks
• Identify potential internal and
external risks that could impact
your company.
• Think about actions you can take
to minimize risk before or
immediately after an event
occurs.
• 5 minutes to identify your risks
• 5 minutes to share
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Business Performance – Risk Warning Signs
Look at trends in your business:
• Excessive debt in relation to owners equity (total liabilities /
owner’s equity)
• Reliance on a small number of customers
• Reliance on one product
• Reliance on one or a small number of vendors
• Cash flow problems
• Irregularities in accounting, bank or timecard records
• Irregularities in computer system administrative reports
• High employee turnover rate
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Risk Identification and Planning
• Develop a written business plan
• Use outside sources to assist in identifying risks
– Consultants
– Trade Association
– SCORE mentor
• Risks of your vendors or supplier
• Identify needs for potential or planned growth
• Discuss risks with managers
• Communicate risks to managers
• Identify needs and PLAN for business continuity
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Review
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Review
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 Budgeting and forecasting help you plan success
 Accurate financial statements are critical to the success
of your company
 Frequent analysis of your income statement, balance
sheet and cash flow statement and spotting trends will
help you manage your business more effectively
 Find the most beneficial sources of funding your growth
 Financial ratios help you analyze certain aspects of your
operations so you can make adjustments to become
more profitable
 Beware of potential risks and planned mitigation
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Next Steps
• Set up your company’s cash flow forecast and/or annual budget /
forecast using the instructions provided for the Excel spreadsheet –
download at:
http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
• Calculate some or all of the financial benchmarks we have discussed
that are important to your business
• Ask your mentor to get the RMA ratios for your business type
• Review the With Your Mentor handout for topics to discuss with your
mentor
Don’t have a SCORE Mentor? Connect with one today!
• SCORE has over 13,000 successful and experienced executives with
small business know-how that want to help you
• Visit manasota.score.org for more information
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Help Us, Help You
Please fill out the workshop
evaluation form
Your feedback is important to
help us improve our programs!
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Other Sources of Financing
Friends or family
Home equity loan
Credit cards (VERY costly)
Department of Community and Economic Development
Department of Agriculture & Rural Development Service
Angels and venture capitalists (equity financing)
Crowd funding – may be donations, loans and/or equity investment
Peer to Peer Loans – i.e. www.prosper.com or
http://www.lendingclub.com
More options will be available in 2013
Grants – generally NOT available with for-profit business
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