Arkansas SBDC: New Venture Guide - Project Financing Worksheet

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NEW VENTURE GUIDE

by the UALR Arkansas Small Business Development Center

Once you have determined how much your project (new venture) will cost to get started, you need to determine how it will be financed. This worksheet is designed to help you organize your financing needs so that they can be presented to your sources of financing (lenders/investors).

Before we begin, there are two concepts which you should understand. These are often confused by first time business borrowers, and an understanding of them will improve your ability to communicate with your lender(s).

The first of these concepts is equity. Equity is the total value of all assets that the business owners have contributed, or will contribute to the business venture. If the owner contribution consists of cash, the amount of that cash is the amount of starting equity. If other assets are contributed, their value is the amount of starting equity. In order to be considered as equity, an asset has to be used in the business.

The second concept is collateral. Collateral is the asset or group of assets that a borrower pledges to a lender as security for a loan. Generally these are assets that are used in the business, but frequently they will also include assets that are not used in the business and may even be owned by someone other than the business borrower.

EXAMPLES:

1.	You own 2 acres of appropriately zoned commercial property valued at $20,000. You want to put up a $50,000 building on the property and start up your business. To get the $50,000 loan to finance your building you offer the lender a first lien on the 2 acres and the new building, when it is complete. In this case, you have a $50,000 loan with $70,000 in collateral; you also have $20,000 equity in the project; the 2 acres is both equity and collateral.
2.	In the previous example, you don't own the 2 acres. In this example you will purchase it and construct the building, financed with a $70,000 loan. In this case you have a $70,000 loan with $70,000 in collateral and, because you contributed none of the assets, $0 equity.
3.	In the example above, your banker won't finance the building without additional collateral. Your parents have $30,000 home equity in their personal residence. With their consent, you offer the banker a 2nd mortgage on the house, in addition to the collateral previously mentioned. You will now have a $70,000 loan with $100,000 in collateral, but you will still have $0 equity in your project because the asset you have offered as collateral (your parent's home equity) is not used in the business.

NOTE: These examples are used merely to demonstrate the concepts of equity and collateral. Except in very rare situations, banks WILL NOT finance projects in which the borrower has no equity. The same can be said of the Small Business Administration.

Once you have determined your Project Cost (see Project Cost Worksheet) you will then need to determine the amount of outside financing your project will need. The first step in this process is to determine the amount of equity that you are contributing. Total Project Cost minus your Total Equity Contributions equals the amount of outside financing that you will require.

Total Project Cost			_______________
LESS: Equity Contributions:
	Cash to be Contributed	_______________
	Value of Real Estate to be Contributed	_______________
	Value of Equipment to be Contributed	_______________
	Value of Other Assets to be Contributed	_______________
	Total Equity Contributions	_______________	_______________
Outside Financing Required			_______________

Once you have determined the amount of financing required, the next step is to determine where this financing can be obtained. There are several different possible sources. Some of these are listed below.

Outside Financing Sources:
	Loans from Friends or Family	_______________
	Trade Credit	_______________
	Loans from Financial Institutions	_______________
	Loans from Other Institutions/Agencies	_______________
	Total Outside Financing		_______________

As was stated earlier, banks and other financial institutions and agencies will almost always require that you have equity in your project. The amount required will depend on the lender, but usually varies between 10% and 50%. These same lenders will generally require enough collateral to secure the loan fully. If the assets of the business will not adequately secure the loan, the lender may require your pledging other assets to secure the loan.

Arkansas Small Business Development Center
University of Arkansas at Little Rock - College of Business
Donald W. Reynolds Center for Business and Economic Development
2801 S. University / Little Rock, Arkansas 72204
Phone: 501.683.7700 Fax: 501.683.7720

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The Arkansas Small Business Development Center is funded in part through a cooperative agreement with the U.S. Small Business Administration through a partnership with the University of Arkansas at Little Rock College of Business and other institutions of higher education. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA. It is the goal of UALR to eliminate discriminatory harassment and to promote equal opportunity regardless of race, gender, color, national origin, sexual orientation, age, religion, veteran’s status, or disability.