Sources of Capital for Entrepreneurial Venture – Explained

Finances, fund, and capital are essentially required for the promotion of an entrepreneurial venture. Without it, no entrepreneur can materialize his ideas or dreams.

Sources of capital for entrepreneurial venture
Sources of capital for entrepreneurial venture

The entrepreneur should keep several elements into consideration, while arranging for the capital on the finances, as the nature of the enterprise, size of the enterprise, production technique, promoting costs, time taken in sale of the commodities, terms and conditions for purchase and sale, level of distribution and trade cycles, etc.

Sources of Capital for Entrepreneurial Venture

Following are the sources for capital Sources for entrepreneurial venture:

1. Sources of Fixed Capital

Shares, debentures, and specific Financial Institutions are the main sources to obtain fixed capital. Shares are of two types equity or ordinary shares and preference shares.

By issuing shares, the company is able to get capital for a longer period and in case of equity shares, the company is not required to return the money, during its lifetime.

Debentures are also an important source to obtain fixed capital.

These are of various types. By their issue, the company’s profits are higher, as compared to those of the debenture holders.

Read more: 37 Essential Qualities of Successful Entrepreneur (Must Know).

The capital may also be obtained from specific Financial Institutions, Like, Industrial Finance Corporation, state finance corporation, or any government finance Institution.

2. Sources to Raise Working Capital

For the promotion of entrepreneurial venture, need is not only of fixed capital but also for the working capital.

An entrepreneur may obtain working capital from various sources, likecommercial banks, public deposits, reinvestment of profit or income, finance on lease or deed, depreciation fund, business credit, indigenous bankers, Purchase on installment payment system, government loans and subsidies, private capital, distribution advance, personal loans, financial companies, advance from customers, accumulated funds, etc.

sources of capital for small business
Sources of capital for small business

After having knowledge about various sources of capital, the entrepreneur has to decide about the particular sources which are to be used by him, and which are not to be used.

Related: Top 11 Tips for Managing Small Business Finances.

For that, he will have to study the factors influencing the capital structure, like:

1. Internal Factors

Nature of the business, Future Plans, asset structure of the business, the approach of the management, income expenditure of the institution, size of the business and control over business are important internal factors.

2. External Factors

These Include the cost of capital issue, the environment of the capital market, seasonal fluctuations, policies of Financial Institutions, competitions prevailing in the market, Texas and provisions for tax realization, nature and types of investors and government control, etc.

Only through the proper study of various factors in influencing the capital structure, an entrepreneur will be able to prepare an optimum capital structure.

But for doing it, he will have to keep some things in view, like simplicity, minimum risks, flexibility, sufficient liquidity, full utilization, maximum profitability, lowest capital cost, consonance with government laws and rules, cash flow capacity, maximum control and maximum return on equity capital, etc.

Related: 15 Importance of Social Responsibilities of Entrepreneurs.

For All aforesaid functions, managerial policies are prepared, like:

1. In trade on equity, the decision is taken whether to do the trade on the basis of loan capital in comparison to owners’ capital or not.

The trade on equity may be low or high. In low trade on equity the volume of the share capital of the company is less than the loan capital, whereas, in high trade on equity, the volume of share capital is more than the Loan Capital.

2. Capital gearing is used for reflecting the proportion between equity share capital and securities of fixed costs. Capital gearing is of two types high and low.

In high capital gearing, the volume of equity, share capital is low then the volume of the loan capital and preference share capital.

Related: 10 Main Factors Affecting Marketing Environment (Explained).

On the contrary, in low capital gearing, the volume of equity share capital is high than the loan capital and preference share capital. When an enterprise is established, the following two functions are required to fulfill the financial requirements:

  • Issuing of securities of variable costs.
  • To collect capital by equity shares in the company, in the initial period. But, with the progress of this enterprise and increase in certainty of income, the capital with fixed cost may be increased.

Related: Top 10 Functions for Establishing A New Business Unit (Step by Step).

3. Cost of capital is the minimum rate of return which is, as usual, maintained to keep per share market value intact (at the current level), so that payment of costs of obtained capital may be made easily.

After preparing the sources of capital influencing factors, optimum capital structure and managerial policies, the study of the effect of new financial capital on the income of shareholders and of risks and controls on equity shares, shares and debentures are also essential.

Thus, now you all know the Sources of capital for entrepreneurial venture.

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