The goal of this lesson is to provide an overview of the most common methods for financing a new business or organization: debt and equity. The lesson begins with an overview of why businesses need external financing and what types of resources are most often needed for a new business. The pros and cons of debt and equity are then introduced, as are the most common features of each. The lesson then applies these same concepts to an existing business from a new project perspective, incorporating the idea of self-generated capital as an additional financing option.

1. Startup Capital and Financing
Objective: To understand how to estimate the amount of capital needed to
start your business and what types of financing are most common for new
businesses.
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2. Startup Capital
• Startup Capital = Resources Needed to Start
Your Business
• One-Time Costs vs. Recurring Costs
• Financing Options: Debt vs. Equity
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3. One-Time Costs
• What do you need to open your business?
– Example: Renovated building
– Example: Machinery and equipment
– Example: A delivery truck
• Current Needs
• Future Needs Based On Projected Growth
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4. Recurring Costs
• What monthly, quarterly, or annual expenses will
your business incur?
– Example: Rent
– Example: Wages and Salaries
• When will the business’s profits be greater than
the recurring costs?
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5. Financing Options
• One-Time Costs + Recurring Costs (until
business is profitable) = Startup Capital
• Be conservative
• Two Main Sources of Capital
– Debt
– Equity
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6. What is Debt?
• Money you have to pay back
• Key Considerations:
– Amount (“Principal”)
– Payback Period
– Interest Rate
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7. Benefits and Risks of Debt
• Benefits:
– Simplicity
– Interest payments may have tax benefits
– No loss of control in your business
– Debt is “cheaper” than Equity
• Risks:
Bankruptcy = Loss of Your Business
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8. What is Equity?
• Capital in exchange for an ownership stake in
your business
• Key Considerations:
– Control given to outsiders
– Investors have right to some or all of the business’s
profits
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9. Benefits and Risks of Equity
• Benefits:
– No repayment
– Reduced threat of bankruptcy
– Strategic advice and support of investors
• Risks:
– Loss of control over business’s strategy and future
profits
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10. Summary: Debt vs. Equity
Debt Equity
• Straightforward • Highly negotiable
Advantages • Potential tax benefits • No repayment terms
• No loss of control • Valuable source of advice
• Potential loss of strategic
• Requires repayment
Disadvantages • Threat of bankruptcy
control
• Potential loss of future profits
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11. Capital Planning
• Same principles apply
• Retained Earnings = Accumulated Profits of
Business
• Benefits of Retained Earnings:
– Reduced need for additional debt or equity
– Improved chance for business sustainability
– Flexibility
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