Capital refers to all the assets you have when you start to run your business. While it is often used in reference to money, that isn’t always the case. Any asset that can be used to produce your goods or services and make them ready for the market falls under the umbrella of capital.
Your ideas, whether big or small, rely on capital to move from thoughts to reality. As outlined in The Entrepreneur’s Journey, raising capital is integral to setting up your business.
Types of Capital.
Capital can be financial, human, or natural.
Financial capital is usually money raised through debt or equity.
Debt is borrowing money while equity is selling parts of the business to raise money. What you choose will depend on factors such as your sector, the nature of your business, and projections you have made in the planning stage.
Human capital mainly means talent in the form of skills or know how which is relevant to the business in question. While this may be your own natural aptitude and experiences and how you utilize them to the benefit of your enterprise, it can also refer to the team you build to help bring your ideas to life.
Natural capital refers to the things that exist in nature, that can be used to create value in a business, and that is sellable. This may refer to raw materials like water, land, or mineral resources.
How to Raise Financial Capital.
They are several ways to raise capital for your business:
- Bootstrapping: This is using your own resources or starting with a zero budget. Many small businesses begin like this, by using savings or any other resource available to them to provide a product or service. This could be using raw materials you may have access to or can afford to buy cheaply to start creating and selling a product e.g. bespoke, personalised journals. This could also apply to providing a service such as page management based solely on your skills, talent, or experience.
- Borrowing from Family & Friends: As most businesses begin informally, it may be useful to approach a few family and friends willing to lend you money at zero or little interest for an indeterminate amount of time. Ideally, this should be for as small a sum as possible and it will be useful to fix a timeframe in your mind and make plans to pay back the loan. Paying back your loans on time and without being asked to, is a sign of a healthy business and is a great discipline to have as your enterprise evolves.
- Bank Loans: The reality is that a startup without assets to serve as collateral for a bank loan is unlikely to get a premium or favourable interest rate. Microfinance banks are a better bet for MSMEs in general but loans from any bank are usually intensive in terms of repayment periods and interest rates.
- Grants and Entrepreneurship Support: There are number of private and public sector grants and other forms of support for businesses that may be useful to your particular venture. You should note that these resources are usually sector specific and require a formal set up of your business to process your application.
- Investors: Selling equity in your business is usually a great way to get initial capital and start with a solid financial backbone. This is usually for a well thought out business idea with a business plan, financial projections, and other documents that explain the business through and through.
Tips on Using Capital Properly.
- Make sure you have a business plan with a budget for starting up the business. It does not have to be complicated and it should be adaptable to the dynamic environment of growing a business from the ground up.
- Keep separate accounts for your business and personal use. This will help you avoid using your capital for other purposes, even in emergency situations. This will be vital especially if your business is capital intensive at the start.
- When you are analyzing your revenue, remember to separate savings, repayment funds, and profit. Savings go back into the business, repayment funds go back to your creditors, and profit can be moved either way. At the start, it may be useful to pay yourself a salary and split profit between savings and further loan repayments to keep your business healthy over the long term.