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Small Business Advancement National Center University of Central Arkansas — Conway Arkansas

115H, College of Business - University of Central Arkansas - 201 Donaghey Ave. Conway, AR Issue: 802 - January 28th, 2014

Upcoming Conferences ABR

Who: Academy of Business Re- When: March 26-28, 2014 search Where: New Orleans, LA What: New Orleans Conference

Who: Allied Academies

When: March 26-28, 2014


What: Spring Int’l Conference

Where: Nashville, TN

sponsibility Conference


Who: Society for Education & Research Development What: Corporate Social Re-

Where: Jakarta, Indonesia

Who: International Council for Small Business

When: June 11-14, 2014


When: June 02-05, 2014

Where: Dublin, Ireland

What: ICSB World Conference


Who: International Conference on Services Management What: Int’l Conference

When: December 10-12, 2014 Where: Macau S.A.R., China

Announcements SBANC





The Small Business Advancement National Center is pleased to tell you that we have revamped our website and newsletter recently. ISBE will be hosting this one day event at Ulster Business School, Belfast Campus during March 13, 2014.

Allied Academies will be hosting their Spring 2014 Conference in Nashville, TN during March 26-28, 2014.

ICSB will be hosting their annual conference in Dublin, Ireland during June 11-14, 2014.

USASBE will be hosting their annual conference in Fort Worth, TX during January 9-12, 2014.

Call for Papers IABE




Who: International Academy of Business and Economics

When: March 16-18, 2014

What: 2014 Winter Conference

Deadline: February 10, 2014

Who: Institute for Gender and Diversity in Organizations

When: May 22-24, 2014

What: IGDO 2014 Conference

Deadline: February 6, 2014

Where: Orlando, FL

Where: Vienna, Austria

Who: Hawaii International Con- When: May 22-25, 2014 ference on Business Where: Honolulu, Hawaii th What: 14 Annual Conference Deadline: April 11, 2014 Who: International Educational Technology Conference

When: September 3-5, 2014

What: IETC 2014 Conference

Deadline: July 20, 2014

Where: Chicago, USA

Negotiating a Loan

In negotiating a bank loan, a small business owner must consider the terms tat will accompany the


of the Week

loan. Four key terms are included in all loan agreements: the interest rate, the loan maturity rate, the repayment schedule, and the loan covenants.

“Bank’s lending policies are not uniform. Some bankers are extremely conservative, while others are willing are more willing to accept some limited risks.” of prime plus 2 and the prime

Rate. If a banker does impose

rate is 3%, the interest rate for

a floor, you might request a

the loan will be 5%. Alterna-

ceiling that the rate cannot go

tively, a banker might state the

above. If the bank agrees to a

rate as “prime plus 200 basis

ceiling of 6.5%, for example,

points.” A basis point is

you will know that your inter-

1/100th of 1%; thus, 200 basis

est rate cannot go any higher

points are the same as 2%.

than that.

rate, is the rate of interest

The interest rate can be a

Although a small firm should

charged by banks on

floating rate that rises over the

always seek a competitive in-

loans to their most credit

loan’s life—that is, as the

terest rate, concern about the

worthy customers. The

prime rate changes, the inter-

interest rate should not over-

LIBOR (London Interbank

est rate on the loan changes—

ride consideration of the

Offered Rate) is the inter-

or it can be fixed for the dura-

loan’s maturity date, its re-

est rate that London-

tion of the loan. A banker may

payment schedule, and any

based banks charge other

also impose a floor on the in-

loan covenants.

banks in London, which is

terest rate so that it cannot go

considerably lower than

below a given rate. For in-

the prime rate.

stance the floor might be set

If a banker quotes a rate

at 3.5%, no matter the prime

Interest Rate The interest rate charged by banks to small companies is usually stated in terms of the prime rate or, occasionally the LIBOR. The prime rate or base

(Continued from Previous Page)

for collateral. However, the

borrower’s creditworthi-

Loan Maturity Date

banker may have the option of

ness at the end of the

imposing a balloon payment

third year if the business

before the loan is fully repaid.

is not going well.

As already noted, a loan’s term should coincide with the use of money—shortterm financing, while long-

A balloon payment allows the bank to require the borrower to

Loan Covenants

pay off the balance of the loan

In addition to setting the

in full by a specified time, ra-

interest rate and specify-

ther than waiting the full term

ing when and how the

for the loan to be repaid. As-

loan is to be repaid, a

sume, for example, that you

bank normally imposes

borrow $50,000 at an interest

other restrictions on the

rate of 6%, and the loan is to be

borrower. These re-

repaid in equal monthly repay-

strictions, or loan cove-

ments over 84 months (seven

nants, require certain ac-

years). The amount of each re-

tivities (positive cove-

payment is determined to be

nants) and limit other ac-

$730 in order to pay off the

tivities (negative cove-

loan in full by the end of the

nants) of the borrower to

seven years. However, the

increase the chance that

banker may include a term in

the borrower will be able

the loan agreement giving the

to repay the loan. Some

bank the right to “call” the loan

types of loan covenants

at the end of 3 years, meaning

that a borrower might en-

the you will have to pay of what

counter include the fol-

you still owed at that time


($31,100). The banker would

1. The company must pro-

have the choice of (1) requiring

vide financial statements

you to pay off the $31,100 at

to the banks on a monthly

the end of the third year, or (2)

basis or, at the very least,

With a term loan, the loan

allowing you to have the re-

quarterly (positive cove-

is set to be repaid over 5

maining four years to pay off


to 10 years, depending on

the loan. This provision per-

the type of assets used

mits bankers to reassess the

term needs demand longterm financing. For example, since a line of credit is intended to help a firm with only short-term needs, it is generally limited to one year. Some banks require that a firm “clean up” a line of credit one month each year. Because such a loan can be outstanding for only 11 months, the borrower can use the money to finance seasonal needs but cannot use it to provide permanent increases in working capital, such as accounts receivable and inventory.

Repay Schedule

(Continued from Previous Page)

personally guarantee the firm’s

You also need to be aware

2. As a way to restrict a

loan. A banker wants the right

of what happens when

firm’s management from

to use both the firm’s assets

you violate a loan cove-

siphoning cash out of the

and the owner’s personal as-

nant. Ultimately, the bank-

business, the bank may

sets as collateral. Even when a

er can make you repay the

limit managers’ salaries. It

business is structured as a cor-

loan in full immediately.

also may prohibit any per-

poration and the owner can es-

More often, the banker will

sonal loans from the busi-

cape personal liability for the

increase the interest rate

ness to the owners

firm’s debts—that is, the owner

or require you to repay the

(negative covenant).

has limited liability—most

loan in a shorter period of

banks still require the owner’s

time. What happens will

personal guarantee (negative

also depend on which


covenant is violated. As

can handle its loan pay-

It is imperative that you pay

one banker noted, “Some

ments. For example, to

close attention to the loan cov-

covenants are like yield

ensure sufficient liquidity,

enants being proposed by the

signs, while others are

the bank may require the

banker. Ask for a list of the

firm’s current assets to be

covenants before the closing

words, bankers use cove-

at least twice its current

date, and make certain that you

nants as warning lights to

liabilities—that is, the cur-

can live with the terms. If you

address any potential

rent ratio ( [current as-

have an existing company, de-

problems before they be-

sets] / [current liabilities] )

termine whether you could

come fatal.

must be equal to or great-

have complied with the cove-

er than 2. Or the bank

nants, especially key ratios, if

might limit the amount of

the loan had been placed dur-

debt the firm can borrow

ing the recent past. Then, if

in the future, as measured

necessary, negotiate with your

by the debt ratio ( [current

banker and suggest more real-

assets] / [current liabili-

istic covenants. Bankers will

ties] x [negative cove-

negotiate, although they may

nant] ).

sometimes try to convince you

3. A bank may put limits on various financial ratios to make certain that a firm

4. The borrower will nor-

mally be required to

otherwise. After all, making loans is the primary source of profits for the bank.

stops signs.” In other

“Carpe per Diem— Seize the Check!” - Robin Williams

Feature Paper


SBANC Staff Director Dr. Don B. Bradley III

Development Intern James Vire

Development Intern

IN SERVICES INDUSTRY This paper was written by Osman Kursat Onat, Mehmet Akif Ersoy University, Ismet Anitsal, Tennessee Tech University, & M. Meral, Anitsal, Tennessee Tech University. The paper was presented at the 2013 Allied Academics San Antonio Conference.

Joshua Tucker


Abstract Services industry attracts many entrepreneurs especially in developed countries. Recent recession showed that economic recovery and job gains were initiated in services first. Increase in entrepreneurial activities in service sector is critical for growth in gross domestic product. However, services marketing require different management approaches from manufactured goods marketing. Distinctive characteristics of services make cost control and pricing challenging for entrepreneurs. Traditional cost accounting methods do not completely fulfill requirements of services, as they focus on units produced. Activity based costing (ABC), on the other hand, focuses on activities that create costs, and classification and allocation of costs via cost drivers. In this paper, a framework of integration of ABC costing into service activities is provided for entrepreneurs and on how to achieve this objective is shared through an illustration of allocation of advertising and promotion costs for an insurance company. (Page 15)

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SBANC Newsletter January 28, 2014