Sources of Capital for Entrepreneurs, Term Paper Example

Introduction

Capital describes the amount needed to start a business or adjust an existing business to more expansive levels. Business operations are anchored on funds right from the start point right into the daily operations. The amount of funding at the start – up point termed as capital is what breathes life into a business idea. In most cases, business ideas will remain unimplemented for months and years due to lack or availability of minimal funding. Entrepreneurs are always expected to make a vital decision when it comes to raising capital for the businesses. In their bid to choose the source of capital, a number of considerations or factor must be noted. The first point of consideration towards sourcing capital for any business is the size and nature of business. It is vital for entrepreneurs to consider the size of the business and the industry type before ascertain the amount and source of capital. Under this point, some business might be small to the extent of being funded by family members and friends while others will go to large wallets of outside sourcing. The another point of consideration is the expected growth; some business is expected to pick up slowly and give good long-term returns while another pick immediately to give short-term returns. This kind of consideration will allow entrepreneurs realize the right source of capital to opt for.

In basic terms, capital is money. Any business with the global market must have capital so as to be in a position to purchase various assets and maintain effective operation. For a long time, entrepreneurs have believed in bank loans and loans from other financial institutions as the best way of raising funds. The truth of the matter is that there several sources of capital that reveal entrepreneurs from the hustle of starting up a business. This study will consider the following as major and effective ways of sourcing funds for business operations;

1. Banks
2. Government grants
3. Family and friends
4. Family and friends investing your start up

Sources of Capital for Entrepreneurs

From the introductory section, capital in the most basic terms refers to money needed for business. Business ideas are muted and fully drawn in mind before implementation. Regardless of the type or nature of business, the first point which must come clear in any capital sourcing is the structure. Business capital is always developed in two main forms debt and equity. Debt, in this case, will represent loans and other credit avenues which must repay with stipulated time and mode in future. Debt capital is always repaid with interest which implies that any business funded on a larger share of debt must be in a position to yield enough amounts to meet the pay – back amount and period. On the other hand, equity does not involve direct requirement or obligation to repay the funds (Nour, 2009). Instead of paying back equity raised funds, equity investors are always privileged to have ownership positions which are usually pegged on the business stock.

Entrepreneurs are expected to take note of the capital formation process. Capital formation process remains a major decider on success and stalled business. As much as people focus on getting money to be pumped into business, it is vital to note that a clear formation process is required. The formation process of a business capital will describe various means through which the expected capital is transferred from the people who save the money to the business that requires the funds. Transfer of money or capital from the people to business can take place directly implying that business sells stocks or bonds to the savers who in turn provide capital to the business (Berkery, 2008). Transfer of capital can also be indirect where banking houses are involved in the investment process. The banking houses, in this case, are intermediaries such as the commercial banks, mutual find bodies and insurance companies who will help deliver the funds to the business on behalf of the savers.

Specific Capital Sources

After taking note of the formation process, it will be vital for entrepreneurs to consider knowing in detail every source of business capital. This study focuses on the four most preferred capital sources across the business environment.

Banks – Every entrepreneur will attest to the fact that banks form a straightforward source of business capital. Banks offer loans for both new starters and already started businesses seeking adjustments. In both cases, banks will require entrepreneurs to do well document business plans and personal guarantees. Based on the fact that funds offered by the banks are loans which might be the short or long term, an entrepreneur must generate enough money to cover the loan payment (Vinturella & Erickson, 2013). Banks are many and desperate to offer entrepreneurs business loans these days. However, it is vital for entrepreneurs to conduct research on various banks and terms of credit facility offered.

Government funding – Government funding marks another source of the capital where a good number of entrepreneurs have explored to see their dreams come true. The government in many cases stands in a better position to direct entrepreneurs to different funding avenues. Apart from giving direct capital through grants, the government recognizes the fact that entrepreneurs need legal and administrative advice on capital sourcing and management as well (Vinturella & Erickson, 2013). Government funding such as grants is largely preferred based on their low or zero interest charges.

Friends and Family – entrepreneurs engage in businesses of different sizes and nature. As a result of this, some of the businesses can be funded from family savings and borrowings from friends. Capital from family and friends is the easiest to obtain and most challenging to manage of all the sources. This is because in many cases people tend to embezzle these funds since they are given with no guideline and timeline of repayment. Entrepreneurs require well drafted personal guidelines on how to manage and invest the capital (Vinturella & Erickson, 2013). The starting point of good management of funds from family and friends entails treating the investors (family and friends) as a real business relationship. This will steer good demonstration on how to use the money and repay it in future.

Friends and Family invest in the startup – Involving family and friends through investing in the startup is another straightforward source of capital. In this kind of capital sourcing, the entrepreneur is expected to a clear business plan and strategy on getting the family and friends on investing. Inviting family and friends to invest in a startup is never easy, to make successful an entrepreneur must go after high – net – worth investors who are cable of taking referrals seriously. To find individuals with investing ability and ready to take referrals seriously, the entrepreneur must ensure serious networking.

The Cost of Capital

Entrepreneurs cannot talk about capital without taking note of the cost. Capital forms the basis of every business operation. Capital is, therefore, a necessary factor of production, like any other. As a result, it has the cost which must be realized for successful operation. Various sources of business capital attract different costs. In the cases where the capital structure of formation is debt, the cost of capital will be marked by the interest that the firm or entrepreneur must pay so as to borrow the funds. Equity capital earns its cost in a slightly different way. In the case of equity capital, the cost of capital is marked by the returns which are paid to the investors in the form of dividends and calculated capital gains. The amount of capital will always be limited.

Conclusion

Capital is the basic item on starting a business. It involves availing money, to ensure purchase and maintenance of various business operations. Entrepreneurs both established and upcoming are expected to take note of the above points of the study to steer good sourcing and application of capital. Based on the analysis, every capital source should be taken seriously with clear guidelines of investing procedures as well as pay back structures. Entrepreneurs should, therefore, allow enough time for analysis on business nature, size and cost of obtaining capital. In summary, obtaining cash or many for basis does not mark the end of capital requirement, entrepreneurs must embrace the spirit planning to create effective payback plans.

References

Berkery, D. (2008). Raising venture capital for the serious entrepreneur. New York: McGraw-Hill.

Nour, D. (2009). The entrepreneur’s guide to raising capital. Westport, Conn: Praeger Publishers.

Vinturella, J. B., & Erickson, S. M. (2013). Raising entrepreneurial capital. London: Elsevier.