This paper explores the different types of capital available for small businesses in the United States. The paper also explains the difference between the different types of capital and my opinion on the information provided in the source regarding the different types of capital.
Keywords: Types of capital, equity capital, debt capital, angel investors, venture capital
Types of capital
Entrepreneurs today looking to start a small business enjoy multiple sources of finance to obtain capital for their business. The US office of Small Business Administration has provided a short write up on the different sources of capital available. These include equity capital, debt capital, angel investment and venture capital.
The article also dwells into the difference between equity and debt capital and provides insights into the type of people who get classified as angel investors or venture capitalist. For example, the article clearly describes that equity capital is money raised by a business in exchange for a share of ownership in the company (Finance Start-up, 2010). The article also describes that angel investors and venture capitalists both stand classified as equity investors. Traditionally, angel investors and venture capitalists normally provide capital to young and aspiring entrepreneurs in whose business they see immense growth potential. It is important to note that in the case of an angel investment or venture capital funding, the capital is not secured by the assets of the company. In other words, if the company / venture incur a loss, the angel investor or the venture capital investor will need to necessarily absorb the loss as a part of the business. The article well describes Angel investors as high net worth individuals who seek to make private investments in anticipation of high return on investments. The article also defines angel and venture capital investments as active form of financing rather than passive form. This simply means that the investor would not be idle upon parting the equity investment but may choose to take active participation in the management of the company by representing themselves in a management / decision influencing position such as the Board of Directors. This is in complete contrast to Debt capital. Debt capital is capital acquired by a company which normally will need to be paid back over a stipulated time with interest. Depending on the lender, the loan could have multiple terms and conditions attached to it. The article clearly defines that a lender who is normally in accounting terms called a creditor does have any ownership within the business and the debt obligation is limited to paying the amount borrowed with interest.
While the article well describes the different forms of capital, it has focused less on defining what might be the ideal financing option for a start-up organization. The reason is simple. Every organization’s need is different. So the mode of financing that an entrepreneur chooses is completely dependent on factors that govern the business at the time of investment or borrowing.
Finance Start-Up (2010). Retrieved from http://www.sba.gov/smallbusinessplanner/start/financestartup/SBA_INVPROG.html