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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

please I don't understand the division of labor increase
Dery Reply
what are the basic concept of economics
Busanga Reply
end mean and scarcity
Dery
What the term economics?
Nuran Reply
economic is the study of mankind in the ordinary business life
Dery
want to find how can a geography teacher can contribute to the economic development of a country .
Bernadette Reply
what is labour
Ab Reply
labour is the skill of a person who knows the tinitiol thinks
Mustafe
what is want, cost,
Muhammad Reply
during reccessionary and unemployment in a country which kind economic policy measure do we adopt
samuel
want is a mere demand of a commodity which is not backed by purchasing power.
marcus
ok
Tetteh
ok
Mustafe
what demand
Mustafe
demand is d desire backed up by d ability to pay
Emmanuel
demand is the purchases power
Dery
in what ways is monopolist competition different from perfect competition
Juliana Reply
The principal difference between these two is that in the case of perfect competition the firms are price takers, whereas in monopolistic competition the firms are price makers. Perfect competition is not realistic, it is a hypothetical situation, on the other hand, monopolistic competition is a pra
marcus
what is economics
Lizzy Reply
is the study of how you can make your own business to develop yourself and even the other countries
Abdifatah
the study of economic enable us to practice how to manage and arranged our daily basic of life.
Jonathan
Economics is a science that studies human behaviour as a relationship between ends and scarce means. .
Dan
Am I totally agree the scare means are the wants and beings the humans need
Anastassiya
simple meaning.....Demand and Supply
Pranav
economics is science and art economics means , branch of that knowledge which teach of economic nature
RAJESH
Economics is the study of human in relation to resources and scarce means to solve problems.
marcus
jkk
marcus
Economics is a Social Science that studies human behavior in relation to resources and scarce means to solve social problems.
marcus
Expalin why demand curve for a perfectly competitive firm is perfectly elastic and eams normal profit in the long run
Abdi Reply
how does elasticity helps in our daily lives
Chris Reply
it help me a lot, in search for slipper I can purchase shoe, in such for car I can purchase bike it helps a lot to everyone in the world.
Jonathan
List and explain four factors of production
Vuyo Reply
capital labour entrepreneur natural resources
Thembi
land labour entrepreneur capital
Ebrima
What is supply
Ogodo Reply
when the supply decreases demand also decreases
Thembi
supply is the quantity of good and services a producer is willing to supply to the market for sale at a particular price
Ebrima
when supply decrease daman is high
Dorcas
supply is the quantity of goods and services which willing to supply to market to sale a particular price
Dorcas
types of demand and the explanation
akin Reply
what is demand
akin Reply
other things remaining same if demend is increases supply is also decrease and if demend is decrease supply is also increases is called the demand
Mian
if the demand increase supply also increases
Thembi
you are wrong this is the law of demand and not the definition
Tarasum
Demand is the willingness of buy and ability to buy in a specific time period in specific place. Mian you are saying law of demand but not in proper way. you have to keep studying more. because its very basic things in Economics.
Hamza
Demand is the price of Quantity goods and services in which consumer's are willing and able to offer at a price in the market over a period of time
Umar
Demand is the quantity of goods and services that the consumer are willing and able to buy at a alternative prices over a given period of time. But mind you demand is quite different from need and want.
Tarasum
Demand can be defined as the graphical representation between price&demand
alkasim
sorry demand is nt a graphical representation between price and quantity demand but instead that is demand curve.
Ebrima
Demand is the willingness and ability of a consumer to buy a quantity of a good over a given period of time assuming all other things remain constant.
Vedaant
Demand is define as the good's and services,that a consumer is willing and able to purchase at a particular period of time.
Jonathan
what is commercialization?
Doris Reply
commercial is the process of changing non profit orientating organisation to profit orientating organisation.
Ebrima

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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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