Learning Objectives:

After reading this chapter, you should be able to:

• Understand the enterprise capital market.
Understand the use of debt versus equity.
• Know how to finance your venture at various stages
of development.
• Know how to value your venture.
Introduction:
This chapter will focus on raising capital by first
discussing the types of capital and then vthe various
sources of capital and their aspects. The chapter
concludes with a discussion of the capital raising
process and the stages in financing.
Two Forms of Capital
1. Debt Financing
2. Equity Financing - Equity financing involves
receiving the capital as well as external advice,
mentorship, contracts, marketing assistance, and
sources supply depending on the source of the
capital.
Debt Financing
• Debt financing usually only involves the venture
receiving capital without any additional
contributions.
• Debt financing occurs when capital is received by
the venture in exchange for regular payments of
interest and reduction in the amount of capital
borrowed.
• Debt capital can take many forms and can have the
interest portion be at a variable or fixed rate. Debt
capital can be secured or unsecured and can or
cannot be convertible into equity as well as have
warrants for common stock included. As these
factors indicate, debt is a very flexible form of
capital that every entrepreneur should consider
particularly if the interest rates are low and the
other costs of convertibility and/or warrants are
minimal. Debt capital is usually faster to obtain and
cheaper than equity capital.
• A majority of small business often use consumer
credit in the form of personal or business credit
cards. Not only does this provide a convenient and
fast method for purchasing goods and services, it
also provides a method for tracking expenses.
• Credit cards can also provide a very expensive
means for borrowing if balances are carried
forward from month to month. The fees, rewards,
costs vary by card such as American Express, Visa,
or Master card, making it important to evaluate
each of the options available.
• The biggest and most frequently used source of
capital are banks. Banks primary business is to
provide loans to businesses and individuals. The
aspects of bank lending decisions and the types of
bank loans are indicated in Table 7.1.
• Most governments offer loan guarantee programs
so that a business in that country can obtain money
even when the bank has determined that it is not
credit worthy. The Small Business Administration of
the United States provides this guarantee which
varies by industry, location, and amount of loan
requested.
Sources of Capital
• Each postal source of capital should be compared
to the ideal capital which is that the capital can be
used forever (length of time), has no cost (cost) and
has no covenants or ownership issues (control).
Self
• In order to raise any equity capital from most any other
source the entrepreneur (self) needs to have money invested
(often called blood equity) as well as all the work on the idea
and the venture to date (often called sweat equity).
• Often, the entrepreneur is the only source of financing which
is called bootstrapping a process through which the
entrepreneur finds creative ways to explore opportunities to
launch the business venture. Bootstrapping usually involves
using the cash flow and credit of the venture; some and more
frequently used are: the personal resources of the
entrepreneur. the resources of the family and friends of the
entrepreneur, harter and pay on performance; as well as stock
options or bonus for employees and any resource provider.
Production, packaging, shipping, delivery and even accounting
are usually the areas for successful outsourcing.
Family and Friends