Page 436 - Business Principles and Management

Chapter 16 • Financing a Business

Obtaining Equity Capital
facts

Acquiring equity capital is approached differently depending on the business’s &
ownership structure. Because equity capital is money invested by the owner, the figures
type of ownership structure determines who can provide the equity capital and
how it is obtained and invested in the business.

SOLE PROPRIETORSHIPS In a recent year, 16,183,715
people were involved as own-
Sole proprietors must rely on their personal assets for capital if they want to retain ers of 1,758,627 business part-
ownership of the company. If owners are wealthy or the needed amount is small, nerships. Most partnerships are
they can invest more of their own money in the business. If they do not have avail- found in finance, insurance,
able cash, they will have to sell personal assets to raise the money. Other options and real estate, followed by
are to mortgage personal property such as a home or obtain a personal loan using service businesses.
the collateral of owned assets such as automobiles, insurance policies, or other
property. Of course, when those funds are invested in the business by the sole pro-
prietor, they are at risk and can be lost if the business is not successful. In addi-
tion, other personal assets that were not invested in the business can be lost if the
business fails.
If the sole proprietor cannot provide additional financing for the business
and chooses to use equity capital, alternative sources will have to be considered.
When others provide equity capital, the form of business ownership will need to
change. The sole owner of a business can obtain additional funds by (1) forming
a partnership and requiring the new partner to invest money in the business, or
(2) forming a corporation and bringing in additional equity and owners by sell-
ing stock.

PARTNERSHIPS

When a business expands by creating a partnership, the partner is not required
to invest money. A partner may be brought into a business because of his or her
business expertise rather than the need for additional capital. However, partners
usually invest their personal resources in the business to balance the amount of

PHOTO: © GETTY IMAGES/PHOTODISC. When successful entrepreneurs

want to expand their businesses,
they often face the problem
of raising large sums of capital.
Other than family and friends,
where can a small business
obtain money to expand or
open additional stores?

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