Sources of Capital
A business cannot be started without capital nor can an existing business run without it. A business requires capital for acquiring fixed assets as well as for operating the business.
First of all, the person starting the business will have to estimate how much capital is acquired. For this he would have to make future projections and determine how much capital he would need immediately, how much would be needed once the business is up and running and so on. Depending on these estimates, he would have to decide on the suitable sources of capital. Would his funds be enough, would he have to depend on friends, should he take a loan and so on. Capital can be sourced through various means.
The primary sources of capital are:
Promoters own money:
For a promoter starting a business on a small scale, his own funds may be a sufficient source of capital.
Friends and relatives:
A person running a business may approach friends and relatives when starting a business or when fresh infusion of capital is required for an existing business.
Banks often help businesses to start as well as expand by providing them loans. Bank loans are frequently sources of capital for small and large companies. Before granting a loan, a bank will conduct a thorough check regarding the background of the borrower. The loan is usually granted against some kind of security or against the guarantee of a known person. Banks would also assess whether the business is a viable, whether the owner has committed his own funds and so on.
To encourage entrepreneurship, specific governmental institutions provide loans to people who wish to start a business.
There are many nongovernmental organizations or NGOs which are formed to encourage the marginalized to start their own ventures. People who wish to start their businesses can borrow loans from them.
A business can raise capital from the public by issuing shares and debentures. When shares are issued, the people who buy the shares also become owners. The shareholders are not paid any interest but are given dividend when the company makes profits at the rate decided by the board. Debentures are debt instruments and the debenture holders are creditors to the company. They are paid interest at a fixed rate irrespective of whether the company makes profits or not. Companies also collect deposits from the public on which they pay a fixed rate of interest.
When a company has a public issue of shares and there are shares which are not subscribed by the public, banks and brokers by a prefix arrangement may take up these shares. This is called underwriting and this too is a source of capital.
Trade or supplier credit:
The vendor often provides credit facility to the business. This is also called trade or supplier credit and it helps the business owner to meet his working capital requirements.
Capital is the lifeblood of an organization and one cannot start a business without ensuring that one can arrange for adequate funds from various sources of capital.