Req 2c — Raising Capital

What Is Capital?

Capital is the money a business needs to start, operate, and grow. It pays for equipment, inventory, rent, employees, and everything else a business needs. Without capital, even the best business idea stays just an idea.

Where that money comes from depends on what type of business you are running.

How Smaller Business Structures Get Capital

Sole Proprietorship

A sole proprietorship is a business owned and operated by one person. It is the simplest business structure — you are the business, and the business is you.

Getting capital as a sole proprietor usually means:

• Personal savings — Most sole proprietors invest their own money to start the business.
• Personal loans — Borrowing from a bank, credit union, or family members. The loan is in the owner’s personal name, which means personal assets (like a car or house) may be at risk if the business cannot repay.
• Credit cards — Some small business owners use personal or business credit cards to cover startup costs, though high interest rates make this risky.
• Microloans and grants — Organizations like the SBA offer small loans and occasionally grants to help entrepreneurs get started.

The key thing about a sole proprietorship is that there is no separation between the owner’s personal finances and the business’s finances. If the business fails, the owner is personally responsible for all debts.

Partnership

A partnership is a business owned by two or more people who share responsibilities, profits, and losses. Partnerships raise capital in ways similar to sole proprietorships, but with one added advantage — more people means more resources.

• Combined personal savings — Each partner contributes money to fund the business.
• Loans — Partners may borrow from banks or other lenders. Each partner is typically personally liable for the business’s debts (in a general partnership).
• New partners — Bringing in a new partner is a way to raise capital. The new partner contributes money in exchange for a share of the profits and decision-making.

Limited Liability Company (LLC)

An LLC combines features of partnerships and corporations. Like a sole proprietorship or partnership, an LLC can be funded through the owners’ personal investments and loans. But like a corporation, it provides limited liability — the owners’ personal assets are generally protected if the business fails.

• Member contributions — LLC owners (called members) invest their own money.
• Bank loans — LLCs can borrow money, and since the business is a separate legal entity, the loan terms may differ from personal loans.
• New members — Adding new members who buy into the LLC brings in additional capital.

Four Ways a Corporation Obtains Capital

A corporation is a more complex business structure that exists as a separate legal entity from its owners. This separation gives corporations unique ways to raise large amounts of capital. Here are four:

1. Selling Stock (Equity Financing)

A corporation can sell shares of stock — small pieces of ownership — to investors. When you buy stock in a company, you become a part-owner (a shareholder). The company gets cash to grow, and you get a stake in its future profits.

When a company sells stock to the public for the first time, it is called an Initial Public Offering (IPO). After the IPO, the stock trades on exchanges like the New York Stock Exchange or NASDAQ.

2. Issuing Bonds (Debt Financing)

A corporation can borrow money by issuing bonds. A bond is essentially an IOU — the company promises to pay back the borrowed amount plus interest over a set period of time. Investors buy bonds because they provide steady, predictable income.

Unlike stock, bonds do not give the buyer any ownership in the company. The bondholder is a lender, not an owner.

3. Retained Earnings

Retained earnings are profits that the corporation keeps and reinvests in the business instead of distributing them to shareholders as dividends. This is often the cheapest source of capital because the company does not have to pay interest or give up ownership.

A company that consistently earns profits can fund its own growth through retained earnings — building new facilities, developing products, or entering new markets.

4. Bank Loans and Lines of Credit

Like any business, corporations can borrow money from banks and other financial institutions. Large corporations often have access to lines of credit — pre-approved amounts they can borrow as needed, similar to how a credit card works but for much larger amounts.

Corporate loans typically have lower interest rates than personal loans because the corporation has assets (buildings, equipment, inventory) that can serve as collateral.

Money fuels a business, but risk can destroy one. Next, learn how businesses protect themselves with insurance.