Q1.
But where do businesses get the capital?
Answer
From three sources, in a definite order of size. Remember first what has to be paid for: capital is money plus human-made resources used to produce goods and services — machinery, tools, equipment, vehicles, vending carts, computers, shops, factories and office buildings. All of that must be bought before the business earns a rupee.
| Source | Who uses it | What it costs the business |
|---|---|---|
| Personal savings, family and friends | Generally the first source for individuals starting a business — Ratna began this way | Nothing formal, but the amount available is small and the family bears the risk |
| A bank loan | Ratna’s own funds were insufficient, so she took a loan from the bank to meet the shortfall | Interest — money paid by the borrower to the lender for using their money for a specific time — repaid along with a part of the loan amount over a period |
| The stock market | Large companies needing a lot of money to expand raise it from the general public by selling shares | A dividend — an amount paid regularly by the company to its shareholders out of its profits |
Why a business does not simply wait and save: because the capital is needed first. Ratna could not serve her first customer until the kitchen equipment was bought and the rent paid. A loan lets a business use tomorrow’s earnings to buy today’s equipment — which is useful and risky in the same breath, because the interest must be paid whether or not the customers arrive. That is the entrepreneur’s risk, and it is why Fig. 7.16 lists “takes risks by investing money and time” as one of the five entrepreneurial tasks.
Tip: notice the difference between the two costs. Interest is a fixed promise — you owe it even in a bad year. A dividend is a share of profit — if there is no profit, there is nothing to share. That is why lenders demand security and shareholders demand growth.