Finding a Source of Finance for Used Book Store


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Finding a Source of Finance for Used Book Store
The partners of the Used Book store are looking into other logical sources of funding for their business. Currently they are receiving funding from a rich relative. For independence, longevity, and success, they feel they need to research other avenues of funding. There are several different types of funding available to them, but they must decide which source would best suit their needs, whether it is remaining with the rich relative or some other source.
Trade credit (open-book credit), credit cards, and SBA guaranteed loans are all types of funding available for small businesses (Ebert & Griffin, 2005). They will need to compare other sources of funding with the benefits and risks involved with remaining with the rich relative.
Trade Credit
Trade credit is the credit extended to businesses by suppliers who let them buy now and pay later. The advantage of trade credit is the ability to take delivery of materials, equipment or other valuables without paying cash on the spot. The practice of trade credit can also help to establish a good working environment between suppliers and the business.
Most suppliers unfortunately will not offer trade credit to a new business that they have not established a working relationship. They will demand payment by cash or check on delivery, or payment by credit card in advance until the business has established that they can pay their bills on time (Entrepreneur, 2008, ¶ 2).
Credit Cards
Credit cards are a convenient and easy way to pay for supplies, material and equipment necessary to start a business. There are several banks that offer business credit cards with different benefits such as reward points, no annual fee, low introductory annual percentage rates, and cash back rewards on purchases (Bankrate, Inc, 2008).
Credit cards may be too convenient to some business owners who do not manage their

finances well. “Many business owners borrow heavily on their credit card only to find

themselves up to their ears in debt. Credit cards are one of the most expensive sources of cash

and have paved the road to bankruptcy court more than once” (Pinson, 2006, p. 143).
What really makes credit cards attractive is that they are not hard to acquire. The two main things that credit card companies look at when issuing credit is personal credit score and established credit of the business owner or owners (Wade, 2006).
SBA Guaranteed Loans

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The Small Business Administration guaranteed loan program is usually a secondary source of financing. A business may seek a SBA guaranteed loan after being denied a loan from conventional lenders. The SBA offers a variety of loan programs, depending on the amount of guaranty determines the amount of hassle. In other words, the higher the guaranty, the more paperwork, and longer the delay. Most of the SBA’s business loans are made by private lenders and then guaranteed by the agency (Pinson, 2006, p. 137).
The benefits of a SBA guaranteed loan are a longer maturity at better repayment terms and interest rates, thereby reducing monthly payments and the initial loan burden (Pinson, 2006).
One of the risks of a SBA guaranteed loan is the application itself. The key requirements for some SBA loan programs are: the business must have been turned down by a bank or other lender to qualify for most SBA Business loan programs, required to submit a guaranty (personal and business), must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and use alternative financial resources first including personal assets, must meet eligibility criteria including size, type of business; operating in the United States or its possessions, use of available funds from other sources, use of proceeds; and repayment (D & B, 2008).
The repayment term of an SBA guaranteed loan is between five and twenty five years depending on the lift of the assets being financed and the cash needs of the business. Working capital loans repayment is usually five to ten years. Some SBA short-term loan programs have shorter repayment terms (D & B, 2008).
Relatives
Funding which comes from relatives or even friends needs to be approached with caution. Before asking a relative for funding a business plan must be in place which will outline the businesses motives and plans. The partners need to make sure that if they continue to accept financing from the rich relative that the business plan is understood and they understand the relative’s motives for investing in the Used Book store (Startup Nation, 2008, ¶ 7).
A loan agreement should be drawn up to protect both parties and ensure that everyone understands this is business, not personal. Some things that should be included in the loan agreement are: term of the loan, payment amount, payment schedule, interest rate, how/when the loan will be paid if the business fails how to handle late or missed payments, and any special arrangements, such as no payments for the first year, interest-only payments, seasonal payments, etc. (Startup Nation, 2008).
Comparison
The most important things the partners need to consider in deciding which type of funding will best suit their needs is how much that funding will cost them. Of the types researched, credit cards are the most costly. The interest rates vary from 9-25%, along with late fees, penalties, and potential bad credit ratings if payments are not made (Bankrate, Inc, 2008). The convenience of them and ease with which they can be acquired make them attractive, but the bottom line on having a credit card is to keep balances low and payments high (Wade, 2006).
Trade credit is a very good idea and should be looked into after the business is established. Suppliers are more willing to grant credit and set up payment arrangements after they have seen proof that the business can pay their bills on time. Some suppliers may be willing to work with business during start up if presented with a properly prepared financial plan (Entrepreneur, 2008, ¶ 2). The benefit of establishing trade credit at the startup of the business is being able to keep cash on hand for operating costs such as employee’s wages, utilities, and payroll taxes. One way to improve cash flow for the first two weeks of any month is to hold on to payroll taxes until the middle of the month, but being sure to pay at the last minute to prevent paying penalties (Paulson, 2000, p. 220). One of the risks of trade credit, if granted, is the cost. Depending on the terms agreed upon, the cost can be quite high. Going over the agreement terms and having a good understanding of the implications late payments can have is a key factor in setting up the terms for trade credit (Entrepreneur, ¶ 6).
SBA guaranteed loans are not as expensive as credit cards and trade credit, but they require early planning and a lot of research to finding the one best suited for the business. Waiting until the last minute is not an option when applying for a SBA loan. Most SBA loan programs require that the business been turned down by a bank or other lending institution, but not all of them (U. S. Small Business Administration, 2008). The risk of a SBA guaranteed loans are the requirements and the timing.
Funding supplied by relatives is the cheapest funding in relation to money, but the cost can be high in terms of personal relations if the repayment schedule is not timely or the business fails (Pinson, 2006, p. 137). Good planning and making sure a loan agreement is reached is important to making this type of funding workable for the business.
Conclusion
The partners have agreed that continuing financing from the rich relative is the best approach for getting the Used Book store off the ground. But as mentioned before, the partners must be sure of the relative’s motives, to approach it as a loan and not an investment, to focus on a repayment schedule, and draft an official loan agreement (Startup Nation, 2008, ¶ 6).
The partners are starting their business with $30,000 on hand and with the financing from the rich relative, feel that applying for a SBA guaranteed loan will be their next step for financing the Used Book store in the future if it becomes necessary. This decision is based upon the amount of money these sources will cost (Pinson, 2006, p. 143).


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