The capital markets offer companies many different ways to raise funds from many
different investors, including individuals and large institutions. Usually, the
first options an entrepreneur explores are private sources of funds. This part
of the capital markets may provide limited amounts of money, but allows companies
to remain privately held and founders to retain control over their operations.
One private option is a corporate loan or line of credit from a bank. The process of qualifying is similar to what you might be familiar with if you’ve arranged a mortgage or large loan. Based on a company’s financial history and prospects, a bank may determine that the company is likely to repay the loan plus interest and advances the company the money.
Another private option is to tap friends and family — private individuals who have some affiliation with the company or its officers and are willing to take investment risk for a share of future profits. A third choice is
venture capital,
or the assets of private investors channeled through a professional investment firm that may add funds to a start-up or maturing company in exchange for a piece of ownership, some say over operations, and a share in the profits.
Professor Samuel L. Hayes,
Harvard Business
School
Professor Samuel Hayes discusses the sources of capital for small- and medium-sized businesses.
In the past, U.S. government loans and tax breaks for smaller businesses helped to offset the difficulty those firms had in accessing private capital markets. In less-developed and developing countries, government sponsored financing programs for smaller businesses might still have validity. But private equity vendors have begun actively penetrating some of these markets to fill the need for capital, just as, over the last 20 years, they have in the United States, where there are any number of financial intermediaries who focus on providing financing to small and medium-sized businesses. That includes private equity groups as well as secured lenders, such as banks.
One private option is a corporate loan or line of credit from a bank. The process of qualifying is similar to what you might be familiar with if you’ve arranged a mortgage or large loan. Based on a company’s financial history and prospects, a bank may determine that the company is likely to repay the loan plus interest and advances the company the money.
Professor 