FIN 375 Week 4 Funding and Debt Options Example

Paying for a Third Location and an E-Bike Floor Plan: Comparing a Bank Line, an SBA 7(a) Loan, Inventory Floor-Plan Financing, an Equipment Lease and an Investor's Equity for a Small Bike Business

[Student Name]

University of Phoenix

FIN/375: Financial Management in the Small Business

Week 4 Assignment

[Instructor Name]

[Date]

The bicycle shop, its lenders and all figures are composites written for a model paper; program features and research findings come from the sources listed and are stated generally.

The bike shop's working capital improvements have reduced its seasonal borrowing need. The owner now wants to open a third location near a new rail trail and to carry a wider range of e-bikes, which customers increasingly want to test ride before buying. The build-out and equipment for the new store will cost about $380,000, and carrying more e-bikes will add about $150,000 of inventory. Asking how to finance growth really asks several questions at once, because a store, a rack of bikes and a busy spring each need a different kind of money. This paper compares the options.

The Needs

The needs differ in how long the money is tied up. Seasonal inventory for spring is needed from February to June each year. The larger e-bike selection is permanent working capital, since the bikes will be replaced as they sell. The new store's leasehold improvements, fixtures and signage, about $300,000, will last ten years. Repair equipment and a service van, about $80,000, will last five to seven years.

The Revolving Line of Credit

The shop's bank offered to increase its line from $125,000 to $175,000 at the prime rate plus 1.5 points, secured by inventory and receivables and guaranteed personally by the owner, with a requirement to repay the balance to zero for 30 days each year. A line suits seasonal needs because it is drawn and repaid as sales cycle, but the annual cleanup requirement makes it unsuitable for permanent needs or long-lived assets.

The SBA 7(a) Loan

The same bank offered an SBA 7(a) loan for the store build-out and part of the permanent working capital. Under the program, the Small Business Administration guarantees a portion of the loan, which lets the lender offer longer terms, typically up to ten years for working capital and equipment, and smaller down payments than a conventional loan. Rates are capped by program rules, and the loan carries an upfront guaranty fee. The owner must provide a personal guarantee. The quoted terms were $350,000 over ten years at prime plus 2.75 points, with about a 10% owner contribution to the project (U.S. Small Business Administration, 2024).

Floor-Plan Financing for E-Bikes

Two e-bike brands offered floor-plan financing through their finance partners: the partner pays the manufacturer when bikes are delivered, the shop pays interest while bikes are in stock and repays each bike's cost when it sells, with any bike unsold after 180 days curtailed at 10% a month. Interest is about 9% after an initial interest-free period of 90 days. Floor-plan financing matches the e-bike inventory exactly, but it adds interest on slow sellers and requires monthly audits of the stock.

Leasing the Equipment

An equipment finance company offered a five-year lease on the repair stands, tools and service van with a $1 purchase option at the end, equivalent to financing at an implied rate of about 10.5%. The lease requires no down payment, and payments are deductible, though the tax result is similar to buying with a loan and depreciating. The shop could instead include the equipment in the SBA loan at a lower rate.

An Investor's Equity

A local customer who sold a business offered to invest $200,000 for a 25% share of the company. Equity requires no payments and would reduce debt, but it would give up a quarter of future profits and a say in major decisions. If the shop's value grows as the owner expects, that 25% would be worth far more than the interest on a loan of the same amount.

Comparing and Matching

The owner compared total cost, flexibility and control, using the matching principle small business finance texts recommend (Scarborough & Cornwall, 2019). Seasonal inventory fits the revolving line. Permanent e-bike inventory fits floor-plan financing for the two brands that offer it, with the interest-free period covering fast sellers. The store build-out and equipment fit the SBA loan, whose ten-year term matches the assets' lives and whose rate is lower than the lease. The investor's equity is not needed now, since the debt service fits the cash forecast, but the owner will keep the relationship open for a later expansion.

Effect on Debt Service

The SBA loan's monthly payment would be about $4,100. With the equipment loan payment and floor-plan interest, annual debt service rises by about $58,000. The cash forecast, updated for the new store's sales and costs, shows cash flow available for debt service of about $210,000 in the first full year, coverage of more than three times, comfortably above the 1.25 most lenders require.

What Could Go Wrong

The plan carries risks the owner should name before signing. If the new store's sales ramp more slowly than forecast, the SBA payment begins before the store covers its own costs, so the owner kept $40,000 of the line undrawn as a cushion through the first summer. Floor-plan curtailments are the second risk: an e-bike model that sits past 180 days starts costing 10% of its price each month, which pushes the shop to discount slow models early rather than hope for a buyer. Rising rates are the third, since the line and the SBA loan both float with prime; a two-point rise would add roughly $10,000 a year to interest, still well within coverage. Naming these risks lets the owner set triggers in advance instead of reacting later.

Why Banks Lend to Shops Like This One

Research on small business lending finds that long relationships with a lender improve access to credit (Petersen & Rajan, 1994). The owner's eleven years with the bank and the improved cash management over the past year are the main reasons the bank offered competitive terms quickly.

Conclusion

The bike shop's growth involves four different needs, and each has a best match: a revolving line for seasonal stock, floor-plan financing for the permanent e-bike selection, an SBA 7(a) loan for the store build-out and equipment and no outside equity for now. Matching financing to the life of each need keeps debt service comfortably within the shop's cash flow.

References

Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3-37. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x

Scarborough, N. M., & Cornwall, J. R. (2019). Essentials of entrepreneurship and small business management (9th ed.). Pearson.

U.S. Small Business Administration. (2024). 7(a) loans. https://www.sba.gov/funding-programs/loans/7a-loans