Page 139 - 1-Entrepreneurship and Local Economic Development by Norman Walzer (z-lib.org)

128 Deborah M. Markley

3. Financing Enterprise Operations. With the doors to the business open,
an entrepreneur will likely begin looking for the capital to cover the
ongoing operating costs of the business. While many small entrepre-
neurs operate with little or no debt—in 1998, 50 percent of businesses
with less than five employees had no loans or lines of credit (RUPRI
Rural Finance Task Force 1997)—most entrepreneurs have difficulty
covering all of their operating costs from current income.
4. Financing Enterprise Growth. Finding the capital to grow a business is
an important obstacle for many entrepreneurs. While it is possible to
bootstrap a business start-up, it is difficult to finance active growth
without the support of external sources of debt or equity capital.

The following sections discuss the sources of capital available to entrepre-
neurs in rural communities during each of these periods of business devel-
opment. The institutional innovations to address capital gaps that arise are
also described.

Financing Idea Generation and Testing
With few exceptions, the capital required to generate and test entrepre-
neurial ideas comes from the entrepreneur’s personal resources. In focus
groups in rural communities across North Carolina, entrepreneurs identi-
fied a need for small amounts of capital, preferably in the form of grants, to
help them develop a product or test a concept. At this stage, entrepreneurs
have no revenue stream and, as a result, need access to capital that requires
no initial payback and that is “patient” through the development process
(i.e., the entrepreneur may make no or interest-only payments during the
start-up phase, and the timing of future payments may be tied to perfor-
mance milestones such as sales).
Most formal lending and investment institutions are unwilling or unable
to provide this type of capital because of their need to generate a return for
investors (venture capital funds) or because of regulatory restrictions (bank-
ing institutions). Lacking access to this type of capital, entrepreneurs turn
instead to their savings, credit cards, and investments/loans from family
and friends.
Access to pre-venture development funds is difficult in urban as well as
rural communities. Entrepreneurs are in a typical catch-22 situation—they
must develop a product or concept in order to convince investors of the
marketability and potential profitability of the idea, yet they need capital to
take the first steps toward product development. This dilemma explains the
heavy reliance by most entrepreneurs on their own or local resources in this
idea generation stage.