Options for Funding (10.3)

You may have heard your parents talk about buying and monitoring their stock. Or maybe you have stock of your own. If you do, you know that you are actually buying a percentage of a company when you buy stock. Why do companies sell stock? And what does stock really mean? This is the third video in Unit 10, Entrepreneurship. Take a look at this breakdown, which shows you how often this unit comes up on district, state, and international exams for each of the different clusters. Hello and welcome. This is Lesson 10.3, Options for Funding. Now let's get to work, team. In this video, we'll be covering three important topics. First, we'll go into the five funding strategies that businesses use. Then we'll discuss two ways to obtain startup capital. Finally, we'll cover the three steps of starting a business. One thing you should know about the vast majority of people starting a business is that they're basically broke. So how do entrepreneurs get the money that they need to start a business? Most entrepreneurs turn to bootstrapping, which is the practice of cutting all unnecessary expenses and operating on as little cash as possible. Entrepreneurs use five main bootstrapping techniques when starting a business. Using free resources, using personal assets, negotiating, monitoring expenses, and bartering. There are free resources all over the place. For example, many startup businesses would love professional advice, but can't necessarily afford to pay a consultant. Instead, a business should look at Score, a free mentoring service for new entrepreneurs, which we discussed in our last video. Next, entrepreneurs can use personal assets to save money on business expenses. They can start their business in their garage instead of renting an office space. That way, they can use their own copier computer and other supplies rather than paying for them. The third bootstrapping technique is negotiation. Surprisingly, a lot of vendors are actually willing to negotiate prices, especially when working with a new startup. The fourth technique is to monitor expenses, which means cutting back on all personal expenses so that you can get by with smaller profits. For example, if you're a fresh entrepreneur, you shouldn't be paying for seven or eight streaming services. Pick one and save your money. The last technique is bartering, which is when you exchange goods or services instead of money for other goods or services. Let's say you need something that another business has. And they need something that you have. You can trade the goods instead of paying each other. For example, you can exchange use of your printer for accounting services. Bootstrapping can help you get off the ground, but eventually you'll need some startup capital, the cash used to start the business. Most entrepreneurs don't have enough cash to actually start a business, so they look to other methods. Equity financing and debt financing. What is equity financing? Let's break it down. Equity is the amount of ownership someone has in a company. For example, if you fund your own business yourself, you have 100% equity. So equity financing is raising money by selling ownership or equity in your company. For example, a lot of people are going to be able to get a loan from a company that has a lot of equity. So equity financing is raising money by selling ownership or equity in your company. For example, a lot of people are going to be able to get a loan from a company that has a lot of equity. So equity financing is raising money by selling ownership or equity in your company. For example, a lot of people are going to be able to get a loan from a company that has a lot of equity. So equity financing is raising money by selling ownership or equity in your company. of companies sell stock. When you buy shares, you're buying equity in the company by investing money into that business. Some entrepreneurs use their own money as equity capital. That way they have 100% equity. Now, lots of entrepreneurs ask family and friends for capital. It's really common, but fair warning. If something goes wrong with the business and you can't pay them back, your relationships with those people might be impacted. Another option is looking for business partners that can contribute to the startup capital and take on some responsibilities. In exchange, they're provided with equity in the business. Next, entrepreneurs can go to angel investors, who are wealthy people who buy equity in startup companies that they hope will grow and make them money. These people are interested in helping you in profiting off of your business. They are usually experienced in the industry and can take either an active role in the company or not. Finally, entrepreneurs can go to venture capitalists, or VCs. These are professional investing groups that fund startups or existing businesses. Any money raised by VCs is called venture capital. VCs are able to invest more money than angel investors and take on more risks. However, they usually only invest if the equity is greater than 25% and if the entrepreneur is relatively experienced. Unlike angel investors, VCs do not have specific industry experience. Instead, they have general management skills. Now let's move into debt financing, which is borrowing money instead of raising money. However, it is a loan, and all loans need to be repaid with interest. Additionally, not everyone can get large loans because you need to have a good credit rating and collateral. Collateral is an asset like a house or a car that will be given to the lender if the loan is not repaid. Loans that require collateral are called secure loans, while those that do not are called, you guessed it, unsecured loans. These are usually less than $100,000 and are based on credit rating. There are a few ways that entrepreneurs can debt finance. First, they can get a loan through a bank or a credit union. This is pretty straightforward. The business is borrowing money and paying it back with interest. On the plus side, banks and credit unions can also authorize overdraft agreements, which allows businesses to write checks for more than the business has. On the downside, A business needs to already be established and have a good credit rating for a bank or a credit union to issue a line of credit in the first place. Besides banks and credit unions, entrepreneurs can also engage in peer-to-peer lending, which is when they borrow money from an investor on a website. In this case, businesses write a proposal for why they need a loan, and investors choose which proposals to fund. The advantage is low interest rates, but the disadvantage is putting your personal information on a public site. Plus, the loans are typically much smaller than bank loans. Businesses can also apply for small business administration or SBA-assisted loans. The SBA has a small loan advantage program, which works closely with banks to provide loans if and only if a business can show that they have the money to repay the loan upfront. People can also borrow from their 401 s, which is a retirement fund. However, you can only borrow up to $50,000, and you have to pay interest on the loan if you take longer than 60 days to pay it back. Entrepreneurs can also borrow money from their family and friends to negotiate better interest rates and repayment plans. The last method of debt financing is trade credit, which is when a business, instead of a bank or credit union, grants a line of credit to another business. This line goes interest-free for 30 or 60 days, but it's usually hard for startups to obtain trade credit. Take a look at this breakdown of equity and debt financing. Feel free to screenshot this if you think you will need a reminder of the different options under each one. So now you know where funding comes from, but you still need to plan where that money is going to go before you start spending. There are three fundamental funding steps in starting a business. An entrepreneur must plan for project startup costs and operating expenses, budget for owner cash withdrawal, and price products and services correctly before actually opening the business. Startup costs are the initial expenses that are required to start the business. Many of these costs can be one-time expenses, like furniture, building deposits, or office equipment. The other type of cost is operating expenses. Unlike one-time expenses, these charges are recurring and are needed to keep the company functioning. Operating expenses can either be classified as either fixed expenses or variable expenses. Fixed expenses are always the same every month, while variable expenses change on a monthly basis. Things like your phone bill or renter's insurance are fixed. But things like your advertising budget or electricity bill change month to month, so they're variable. According to a USA research firm, 20% of small business owners underestimate their startup costs and over 33% of these owners underestimate their operating expenses. So it's really important to give yourself some wiggle room when calculating your finances ahead of time. I've always liked the rule of two. Expect everything to cost twice as much and take twice as long as you think it will. You might think this is overkill, but it's necessary to keep your business on track. Make sure you calculate exactly how much you can afford after applying the rule of two. To do that, there are some resources that can help you accurately project startup costs. You can review financial reports from companies in your industry to learn what they're spending on operating costs. Literally just type in a company name plus income statement and you'll find it. You can also ask businesses around you that are not direct competitors about their operating expenses. To calculate your own costs there are plenty of tools on the internet such as startup cost calculators. Finally, Score provides mentors who will be able to help you figure this out as well. Next, you've got to get paid. A business owner doesn't always receive a salary from the business itself. Salaries are compensation for employees, not the owner. But sometimes an owner needs to withdraw cash or assets from their business to... personal expenses. This is also known as a draw and it's crucial that you plan for the possibility of a draw ahead of time. You also need to plan how much money will come into the business which is why you need to price your products and services correctly. But how? You'll for sure have to do some research but oftentimes you'll need professional advice as well. as well. You have to strike a balance between a competitively low price but still enough for the business to make a reasonable profit. Profit margin is the amount by which a product sales exceeds the cost of producing them. It's typically represented as a percentage. Here's the formula. For example, let's say a fedora costs you 22 bucks to make and you sold it for 25. First you do 25 minus 22. That's 3. You divide 3 by the net sales which is 25. 3 divided by 25 is 0.12. You multiply that decimal by 100 to get a percentage. Your final answer is the price of the product. the profit margin. In this case, that's 12%. One of the major components of pricing products and services correctly is sales forecasting. Forecasting your sales is important, not only to project your revenue, but also to make sure that your business has enough products to sell. As I mentioned earlier, most businesses follow the rule of two, and in this case, that refers to cutting your most hopeful sales estimates in half to accurately project sales. In this case, it's better to underestimate than overestimate. That way, you'll know you'll be able to afford your operating costs, even if you don't have a great sales month. Additionally, sales forecasting should be done in dollars and number of units. to be sold. Sales forecasts are done monthly, quarterly, and yearly. Another major component is calculating the break-even point. Take a look at this graph. The break-even point is the point in the middle, where the amount of revenue equals expenses. If the business keeps making money, they'll start making a profit. As you can see, variable expenses initially increase, so the profit margin is small at first, before it gets larger. You should calculate your break-even point before launching the business so that you know how much funding you need before you earn a profit. In order to calculate the break-even point, estimate your total cost by adding fixed fixed and variable expenses. Then project your sales for the year. Plot both total costs and sales for the year on a graph. The point where these two lines intersect is your break-even point. Once you reach your break-even point, you might want to produce more goods so that you can sell more and make more profits. But that means you'll need to tweak your sales estimates, which is where marginal benefit and marginal cost come in. When you increase production of a product, the average cost of manufacturing each singular product goes down. Since cost per product goes down, the profit for each item sold goes up. This difference is called marginal benefit. It's the potential gain of producing more products because the profit margin is higher. For example, there is a marginal benefit if your profit margin goes from 12% to 25% by selling additional fedoras. That sounds great, but you don't want to spend all your resources making millions of fedoras. Even though there's marginal benefit, you're ultimately going to take a loss if those products don't sell. This is called marginal cost, and it refers to potential losses from producing more products that don't sell. Now that we've gone over all the content, it's time to test your knowledge with a real deck of questions. Pause the video and try to answer. The answer is D, angel investor. As we discussed, angel investors are wealthy individuals that invest in new startups to help them get off the ground. Here are the sources we used for this video. Feel free to check them out if you still have any questions. All right, that pretty much sums up lesson 10.3, options for funding. Great work, team, and we'll see you in the next video.

Why do companies sell stock? And what does stock really mean? This is the third video in Unit 10, Entrepreneurship. Take a look at this breakdown, which shows you how often this unit comes up on district, state, and international exams for each of the different clusters.

Hello and welcome. This is Lesson 10.3, Options for Funding. Now let's get to work, team. In this video, we'll be covering three important topics. First, we'll go into the five funding strategies that businesses use.

Then we'll discuss two ways to obtain startup capital. Finally, we'll cover the three steps of starting a business. One thing you should know about the vast majority of people starting a business is that they're basically broke. So how do entrepreneurs get the money that they need to start a business? Most entrepreneurs turn to bootstrapping, which is the practice of cutting all unnecessary expenses and operating on as little cash as possible.

Entrepreneurs use five main bootstrapping techniques when starting a business. Using free resources, using personal assets, negotiating, monitoring expenses, and bartering. There are free resources all over the place. For example, many startup businesses would love professional advice, but can't necessarily afford to pay a consultant. Instead, a business should look at Score, a free mentoring service for new entrepreneurs, which we discussed in our last video.

Next, entrepreneurs can use personal assets to save money on business expenses. They can start their business in their garage instead of renting an office space. That way, they can use their own copier computer and other supplies rather than paying for them.

The third bootstrapping technique is negotiation. Surprisingly, a lot of vendors are actually willing to negotiate prices, especially when working with a new startup. The fourth technique is to monitor expenses, which means cutting back on all personal expenses so that you can get by with smaller profits. For example, if you're a fresh entrepreneur, you shouldn't be paying for seven or eight streaming services.

Pick one and save your money. The last technique is bartering, which is when you exchange goods or services instead of money for other goods or services. Let's say you need something that another business has.

And they need something that you have. You can trade the goods instead of paying each other. For example, you can exchange use of your printer for accounting services.

Bootstrapping can help you get off the ground, but eventually you'll need some startup capital, the cash used to start the business. Most entrepreneurs don't have enough cash to actually start a business, so they look to other methods. Equity financing and debt financing. What is equity financing? Let's break it down.

Equity is the amount of ownership someone has in a company. For example, if you fund your own business yourself, you have 100% equity. So equity financing is raising money by selling ownership or equity in your company.

For example, a lot of people are going to be able to get a loan from a company that has a lot of equity. So equity financing is raising money by selling ownership or equity in your company. For example, a lot of people are going to be able to get a loan from a company that has a lot of equity.

So equity financing is raising money by selling ownership or equity in your company. For example, a lot of people are going to be able to get a loan from a company that has a lot of equity. So equity financing is raising money by selling ownership or equity in your company. of companies sell stock.

When you buy shares, you're buying equity in the company by investing money into that business. Some entrepreneurs use their own money as equity capital. That way they have 100% equity.

Now, lots of entrepreneurs ask family and friends for capital. It's really common, but fair warning. If something goes wrong with the business and you can't pay them back, your relationships with those people might be impacted.

Another option is looking for business partners that can contribute to the startup capital and take on some responsibilities. In exchange, they're provided with equity in the business. Next, entrepreneurs can go to angel investors, who are wealthy people who buy equity in startup companies that they hope will grow and make them money. These people are interested in helping you in profiting off of your business. They are usually experienced in the industry and can take either an active role in the company or not.

Finally, entrepreneurs can go to venture capitalists, or VCs. These are professional investing groups that fund startups or existing businesses. Any money raised by VCs is called venture capital.

VCs are able to invest more money than angel investors and take on more risks. However, they usually only invest if the equity is greater than 25% and if the entrepreneur is relatively experienced. Unlike angel investors, VCs do not have specific industry experience. Instead, they have general management skills. Now let's move into debt financing, which is borrowing money instead of raising money.

However, it is a loan, and all loans need to be repaid with interest. Additionally, not everyone can get large loans because you need to have a good credit rating and collateral. Collateral is an asset like a house or a car that will be given to the lender if the loan is not repaid.

Loans that require collateral are called secure loans, while those that do not are called, you guessed it, unsecured loans. These are usually less than $100,000 and are based on credit rating. There are a few ways that entrepreneurs can debt finance.

First, they can get a loan through a bank or a credit union. This is pretty straightforward. The business is borrowing money and paying it back with interest. On the plus side, banks and credit unions can also authorize overdraft agreements, which allows businesses to write checks for more than the business has. On the downside, A business needs to already be established and have a good credit rating for a bank or a credit union to issue a line of credit in the first place.

Besides banks and credit unions, entrepreneurs can also engage in peer-to-peer lending, which is when they borrow money from an investor on a website. In this case, businesses write a proposal for why they need a loan, and investors choose which proposals to fund. The advantage is low interest rates, but the disadvantage is putting your personal information on a public site.

Plus, the loans are typically much smaller than bank loans. Businesses can also apply for small business administration or SBA-assisted loans. The SBA has a small loan advantage program, which works closely with banks to provide loans if and only if a business can show that they have the money to repay the loan upfront. People can also borrow from their 401 s, which is a retirement fund. However, you can only borrow up to $50,000, and you have to pay interest on the loan if you take longer than 60 days to pay it back.

Entrepreneurs can also borrow money from their family and friends to negotiate better interest rates and repayment plans. The last method of debt financing is trade credit, which is when a business, instead of a bank or credit union, grants a line of credit to another business. This line goes interest-free for 30 or 60 days, but it's usually hard for startups to obtain trade credit.

Take a look at this breakdown of equity and debt financing. Feel free to screenshot this if you think you will need a reminder of the different options under each one. So now you know where funding comes from, but you still need to plan where that money is going to go before you start spending.

There are three fundamental funding steps in starting a business. An entrepreneur must plan for project startup costs and operating expenses, budget for owner cash withdrawal, and price products and services correctly before actually opening the business. Startup costs are the initial expenses that are required to start the business.

Many of these costs can be one-time expenses, like furniture, building deposits, or office equipment. The other type of cost is operating expenses. Unlike one-time expenses, these charges are recurring and are needed to keep the company functioning. Operating expenses can either be classified as either fixed expenses or variable expenses.

Fixed expenses are always the same every month, while variable expenses change on a monthly basis. Things like your phone bill or renter's insurance are fixed. But things like your advertising budget or electricity bill change month to month, so they're variable. According to a USA research firm, 20% of small business owners underestimate their startup costs and over 33% of these owners underestimate their operating expenses. So it's really important to give yourself some wiggle room when calculating your finances ahead of time.

I've always liked the rule of two. Expect everything to cost twice as much and take twice as long as you think it will. You might think this is overkill, but it's necessary to keep your business on track.

Make sure you calculate exactly how much you can afford after applying the rule of two. To do that, there are some resources that can help you accurately project startup costs. You can review financial reports from companies in your industry to learn what they're spending on operating costs. Literally just type in a company name plus income statement and you'll find it.

You can also ask businesses around you that are not direct competitors about their operating expenses. To calculate your own costs there are plenty of tools on the internet such as startup cost calculators. Finally, Score provides mentors who will be able to help you figure this out as well.

Next, you've got to get paid. A business owner doesn't always receive a salary from the business itself. Salaries are compensation for employees, not the owner. But sometimes an owner needs to withdraw cash or assets from their business to...

personal expenses. This is also known as a draw and it's crucial that you plan for the possibility of a draw ahead of time. You also need to plan how much money will come into the business which is why you need to price your products and services correctly.

But how? You'll for sure have to do some research but oftentimes you'll need professional advice as well. as well.

You have to strike a balance between a competitively low price but still enough for the business to make a reasonable profit. Profit margin is the amount by which a product sales exceeds the cost of producing them. It's typically represented as a percentage. Here's the formula.

For example, let's say a fedora costs you 22 bucks to make and you sold it for 25. First you do 25 minus 22. That's 3. You divide 3 by the net sales which is 25. 3 divided by 25 is 0.12. You multiply that decimal by 100 to get a percentage. Your final answer is the price of the product. the profit margin. In this case, that's 12%.

One of the major components of pricing products and services correctly is sales forecasting. Forecasting your sales is important, not only to project your revenue, but also to make sure that your business has enough products to sell. As I mentioned earlier, most businesses follow the rule of two, and in this case, that refers to cutting your most hopeful sales estimates in half to accurately project sales.

In this case, it's better to underestimate than overestimate. That way, you'll know you'll be able to afford your operating costs, even if you don't have a great sales month. Additionally, sales forecasting should be done in dollars and number of units. to be sold. Sales forecasts are done monthly, quarterly, and yearly.

Another major component is calculating the break-even point. Take a look at this graph. The break-even point is the point in the middle, where the amount of revenue equals expenses.

If the business keeps making money, they'll start making a profit. As you can see, variable expenses initially increase, so the profit margin is small at first, before it gets larger. You should calculate your break-even point before launching the business so that you know how much funding you need before you earn a profit. In order to calculate the break-even point, estimate your total cost by adding fixed fixed and variable expenses. Then project your sales for the year.

Plot both total costs and sales for the year on a graph. The point where these two lines intersect is your break-even point. Once you reach your break-even point, you might want to produce more goods so that you can sell more and make more profits.

But that means you'll need to tweak your sales estimates, which is where marginal benefit and marginal cost come in. When you increase production of a product, the average cost of manufacturing each singular product goes down. Since cost per product goes down, the profit for each item sold goes up.

This difference is called marginal benefit. It's the potential gain of producing more products because the profit margin is higher. For example, there is a marginal benefit if your profit margin goes from 12% to 25% by selling additional fedoras.

That sounds great, but you don't want to spend all your resources making millions of fedoras. Even though there's marginal benefit, you're ultimately going to take a loss if those products don't sell. This is called marginal cost, and it refers to potential losses from producing more products that don't sell. Now that we've gone over all the content, it's time to test your knowledge with a real deck of questions. Pause the video and try to answer.

The answer is D, angel investor. As we discussed, angel investors are wealthy individuals that invest in new startups to help them get off the ground. Here are the sources we used for this video. Feel free to check them out if you still have any questions.

All right, that pretty much sums up lesson 10.3, options for funding. Great work, team, and we'll see you in the next video.

Transcript for:Options for Funding (10.3)

Transcript for:
Options for Funding (10.3)