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By the end of this section, you will be able to:
  • Describe financial capital and how it relates to profits
  • Discuss the purpose and process of borrowing, bonds, and corporate stock
  • Explain how firms choose between sources of financial capital

Firms often make decisions that involve spending money in the present and expecting to earn profits in the future. Examples include when a firm    buys a machine that will last 10 years, or builds a new plant that will last for 30 years, or starts a research and development project. Firms can raise the financial capital they need to pay for such projects in four main ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by borrowing through banks or bonds; and (4) by selling stock. When owners of a business choose sources of financial capital, they also choose how to pay for them.

Early stage financial capital

Firms that are just beginning often have an idea or a prototype for a product or service to sell, but few customers, or even no customers at all, and thus are not earning profits. Such firms face a difficult problem when it comes to raising financial capital: How can a firm that has not yet demonstrated any ability to earn profits pay a rate of return to financial investors?

For many small businesses, the original source of money is the owner of the business. Someone who decides to start a restaurant or a gas station, for instance, might cover the startup costs by dipping into his or her own bank account, or by borrowing money (perhaps using a home as collateral). Alternatively, many cities have a network of well-to-do individuals, known as “angel investors,” who will put their own money into small new companies at an early stage of development, in exchange for owning some portion of the firm.

Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. These firms gather money from a variety of individual or institutional investors, including banks, institutions like college endowments, insurance companies that hold financial reserves, and corporate pension funds. Venture capital firms do more than just supply money to small startups. They also provide advice on potential products, customers, and key employees. Typically, a venture capital fund invests in a number of firms, and then investors in that fund receive returns according to how the fund as a whole performs.

The amount of money invested in venture capital fluctuates substantially from year to year: as one example, venture capital firms invested more than $48.3 billion in 2014, according to the National Venture Capital Association . All early-stage investors realize that the majority of small startup businesses will never hit it big; indeed, many of them will go out of business within a few months or years. They also know that getting in on the ground floor of a few huge successes like a Netflix or an Amazon.com can make up for a lot of failures. Early-stage investors are therefore willing to take large risks in order to be in a position to gain substantial returns on their investment.

Questions & Answers

Helloo, im new, can i get to know more?
Saniya Reply
You ask questions on any topics you find difficult.
Favour
is price elasticity of demand the same as elasticity of demand
Favour Reply
not really
Victoria
hi
Gh
hello
Bhartendu
i hope everyone be ok
Gh
No
Hassan
please explain
Favour
No
William
explanations please
cleophas
price elasticity of demand is the reaction of customers /demand to price changes(increase or decrease) elasticity of demand is the reaction of prices brought about by the change in demand
Victoria
thank you
Favour
state the laws of demand and supply
William
dd: when price rises demand decreases whereas when price reduces dd rises ss: when ss rises the price rises and when ss decreases price also reduces. There is a positive relationship
Dhoonah
nice
Victoria
Draw a demand curve graph
William
though price elasticity and elasticity are used interchangeably, the demand can respond to income changes and prices of related goods as well.
Gurpalak
what is economic
Seray Reply
It is a social science which studies human behavior as a relationship between ends and scarce which have alternative uses
Obeng
what is norminal wage
Demba Reply
is the wages measured in money as distinct from actual purchasing power
Favour
what is demand curve
Azeez Reply
this is a curve that slop downward from left to rich
Obeng
yes
Basanta
different between capital and wealth
Samuel Reply
What is scale of reference?
Finda Reply
What is monopoly?
Finda
It is the control of market by single seller or producer
Mayen
the exclusive possession or control of the supply or trade in a commodity or services
Brains
what is scarcity
Bonny Reply
scarcity means that the resources which we can produce goods and services relatives to wants for them.
Bonny
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
Bonny
needs of people ar called demand
Francis
what's the difference between opportunity cost and production possibility curve?
Francis
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
Bonny
different between capital and wealth
Samuel
apportunity cost means the profit lose when one alternative is selected over other
Bonny
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Abubakari
It deals with making choices in the face of scarcity
Abu
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
Bilal
what is scarcity
Bonny
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
Sean
what is perfect complements?
Bilal
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
Winny
economics is important on expenditure analysis
Umar
because it is to make choice
Puosour
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Sarah
Economic is important because of the fact of scarcity and desire for efficiency...
Ernest
it enable us to make rational choice
Osman
what is unemployment
scor
unemployment occurs when a person is actively searching for employment is unable to find work .....
Fatema
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
Lintoya
It is important because economics provide solutions about scarcity.
Pobreng
which of the following measures will the government take during inflation?
Ally

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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