Financing the Venture
Fund sources could be obtained from formal or informal
Capital Requirements
From an entrepreneur's viewpoint, capital is not all about or
does not necessarily mean money. In fact, some entrepreneurs
consider idea (an innovative idea) as a form of capital that is
much more precious than money. From financial viewpoint,
however, capital comes in monetary terms and in three forms
as follows:
1.Fixed Capital. Refers to the money needed to purchase
fixed assets or capital goods. This includes amounts meant for
the acquisition of machinery, buildings, office equipment, and
all those fixed assets or the items needed in the provisions of
services to the customer.
2. Working Capital. After putting up the business with all the
basic amenities and capital items in place as preparation for
operationalizing the business, the other capital requirements,
which refers to the working capital, is needed to fund the day-
to day operations of the business. Working capital represent
the money or hard cash to support its normal short-term
operations. It is generally used for inventory, payroll, utilities,
and stock inventory, and also to take care of the unexpected
emergencies, as well as to keep the business an ongoing
concern
3. Growth Capital. Unlike working capital, growth capital is
not related to daily or seasonal requirements or funds of the
business. Instead, growth capital requirements are needed
when an existing business is set to expand, diversify, or change
its directions.
Sources of Capital
After going through the rigors of preparing the business plan,
the search for capital is the next challenge or headache that the
entrepreneur shall be bothered with, in case he himself does
not have the personal capital to fund the business. In searching
for capital to launch a company, an entrepreneur faces most of
the same issues that small business owners do in looking into
expanding an existing business.
In broad terms, funds needed for the business can be
generated either internally or externally.
Internal fund sources generally refer to the funds which are
owned by the entrepreneur himself or the company, whereas
external capital essentially refers to those beyond the means
of the entrepreneur and the company, or those external to the
entrepreneur or the business organization.
Other than sourcing capital internally or externally, capital may
be sourced from formal or informal sources as discussed here
under.
The formal or informal sources
sources. By formal sources, it means sourcing or borrowing
funds from organizations or institutions duly authorized by
government or by law to extend financial assistance or other
forms of support services to business and industry. They
include banks (both private commercial banks and government
Owned or controlled financial institutions), investment houses,
lending investors, mortgage bank, pawnshops, credit card
companies, and others.
Informal sources, on the other hand, include those fund
sources other than formal sources mandated by law to provide
capital or financing to business organizations. This group
includes the entrepreneur's parents, brothers and sisters,
relatives, friends, suppliers, and other fund providers outside of
the financial system (i.e., informal sources including usurers).
The very formal structure and bureaucratic nature of formal
Sources of funds makes it a more difficult source, owing to a
number of documentary, as well as stringent collateral
requirements that formal sources usually requires from the
entrepreneur or borrower.
The advantage, however, in dealing with formal funds sources,
such as Commercial banks and the government financial
institutions, is that the bank normally provides some technical
and advisory services that should be of help to the
entrepreneurs if used and followed to the fullest. As a Source of
funds for the business. Informnal sources have some advantage
in the form of minimal documentary requirements that is
inherent to an informal organization. Quite often, however,
funds sourced from informal sources could be more expensive
in many ways.
Owners' equity
In a corporation, the contribution of the owner to the capital of
the business is called equity and is evidenced by the issuance of
stockholder's certificate issued by the corporation, It is also
oftentimes referred to as the ownership in the corporation and
the holders of stock certificates are called stockholders. The
stockhoiding represents a percentage of voting rights or control
of the stockholder in the corporation. A holider of a common
stock pOssesses voting rights and controlling power at the
same time, assuming all formns of risks inherent to the
investments in the Company. Unlike the holder of a common
stock, a holder of a preferred stock does not have the voting
rights and otther privilege similarly accorded to common
stockholders and does not assume ali the risk of the business.
Instead, preferred stockholders are guaranteed a fixed return
on the investments, regardiless of the operational outcomne of
the business. huucinece or carnaration. there IS no