The entrepreneur’s likely sources of venture capital are banks, private capital investments, and customer contributions. With sufficient capital investments, the entrepreneur can easily secure loans to aggressively pursue his business goals and objectives.
Featured as a risk taker, innovative, and visionary coupled with initiative and true business abilities, these qualities make him worth of external capital injection. Success is evident from gains made in business sales revenues in the range of $750,000 a year.
This is also demonstrated by a striking rise from a humble beginning when the business consisted of an old computer and a single two head machine to its current status.
Advantages and Disadvantages of Sources of Capital
A bank loan is a reliable source of capital for any business enterprise. Bank loans are offered at competitive interest rates which are pegged on current market rates (Grossman & Livingstone 2009, 145).
Drucker (2009, 200) argues that with minimum interest rates the entrepreneur has the advantage of retaining more profits while a small amount of the profits goes towards loan repayments under the mortgage loan agreement, thus generating more revenue to the business.
In addition to that, bank loans are readily available, relatively cheaper to service, and can easily be secured by one with a good score card. The entrepreneur’s history of innovativeness and growth are contributing factors to a good score card.
However bank loans have their disadvantages. A bank loan is secured against collateral that is used to evaluate the amount of money to loan an individual. Should the entrepreneur’s financial needs be in excess of his collateral, the lending bank may not provide sufficient amount of money to meet the entrepreneur’s financial needs.
Bank loans take long to process. This may be a disadvantage to the entrepreneur in that delays may deny or completely damage available opportunities as other entrepreneurs may identify and seize upon existing opportunities if no timely financial intervention is made available to the entrepreneur in need.
Bygrave and Zacharakis (2004, 125) argue that if credit scores for the new entrepreneur are not excellent, that too may deny the entrepreneur an amount equivalent to the financial needs spelt out in the business plan. The bank may foreclose to recover its loan if the entrepreneur defaults to repay the principal and the accruing interest.
For personal loans, repayment may be pegged on individual relationships. Interest rates can be negotiated and at times these loans can be secured without attracting any interest. Personal loans do not take long to process.
However the disadvantage lies in the fact that the lender may decide to change the terms and conditions of the agreement on the loan if no article or memorandum of understanding was signed at the time of lending, between the lender and the borrower.
The amount loaned out may be limited depending on the financial status and willingness of the lender to give. This may compel the entrepreneur to borrow from more friends. The process may be time consuming.
Loans secured from customers have flexible interest rates. Terms and conditions for repayments can be negotiated. However there is the possibility of customers developing the perception that the business belongs to them and that may lead to the possibility of external interference.
Capital Needs and Why
A bank could act as the best source of capital. Banks have already had sufficient information about the current situation of the entrepreneur and have attractive and competitive interest rates with readily available finance.
Bygrave, W.D., & Zacharakis A. (2004). The Portable MBA in Entrepreneurship (3rd Ed), New York: J. Wiley & Sons Inc.
Drucker, P.F. (1985). Innovation and Entrepreneurship: Practice and Principle (6 th Ed). New York: Harper & Row.
Grossman, D. & Livingstone, J.L. (2009). Portable MBA in Finance and Accounting (4 th Ed), New York: J. Wiley & Sons Inc.