Anyone who starts a business wants to see it grow into a big venture. Most start-up entrepreneurs put back their generated profits into the business to increase stock. For already established ventures, capital is required to develop the long-term assets such as land and infrastructure. These big investments may also need additional funds for IT staffing as well as catering for other needs that will improve service delivery. Therefore, capital is a very crucial component in the success of any business. It is one of the primary factors of production along with labor and land.
Sources of Capital
There are numerous sources where businesses can obtain capital. For example, a business owner can decide to put back all the earned profits into the business. This source is not commonly used as most entrepreneurs have other needs that they intend to cater for with the earnings. A considerable number of entrepreneurs opt to borrow funds from a lender. There are two types of borrowed funds that entrepreneurs can use to develop their business entities. They include:
1. Senior capital
This kind of money is also known as secured capital. The institution that gives the capital is called a secured lender. There are numerous kinds of secured lenders. They include institutions such as banks, commercial lenders, asset-based lenders and term lenders. To obtain a loan from these lenders, you primarily require having collateral that is used as security in case you default in paying back the funds. Senior capital lenders are paid first in case a company goes into liquidation.
2. Junior capital
These lenders mostly work under secured lenders. They offer smaller loan amounts as compared to secured lenders. When a company is liquidated, these lenders are paid after the senior capital lenders have been given back their funds.
You need to compare the different rates at which the lenders are giving funds. From the various sources, you can choose the cheapest one. However, it is advisable to read the lenders’ terms and conditions carefully. This will ensure that you don’t miss vital points that may later affect you, especially during repayment. Most entrepreneurs who own already an established venture that is growing at a steady rate prefer to obtain funds from senior lenders.
The amount of capital that any venture requires depends on the size of the company. Based on this argument, there are two types of capital investments that are used by companies. They include:
a) Growth Capital
This type of capital is used by small ventures that want to develop to larger businesses. For such a company to grow, it requires investing in infrastructure, inventory and personnel immensely. In the case of companies that are jointly owned, the majority shareholder may want to buy out several other owners. A company that runs on loans provided by the owner’s friends and other family members may also want to grow at some point. Such a company can approach a senior capital lender such as a bank to provide the funds.
Before approaching any lender for growth capital, you should first evaluate the actual amount of funds that you require. The current growth rate of your company is also a crucial consideration in deciding the amount that you require. Also, consider the projected growth rate of your company after the acquisition of the funds. This will enable you to determine whether you can capably pay back the loan.
b) Expansion Capital
Business ventures that are already established companies require these funds. Such companies may require funds to expand their markets for example to overseas. An established entity may also require funds to change its systems to be in phase with the latest technologies. Before obtaining expansion capital, a company should evaluate the expected impact of the funds. This will be crucial in determining the payment capability.
In a nutshell, all companies require funds to increase their profits. Numerous financial sources offer loans at affordable rates. However, it is advisable for a company to evaluate its ability to pay back the funds before obtaining the loan.