Final answer:
Financial capital is crucial for businesses to fund their activities and grow, but profits alone may not suffice. Companies raise capital through angel investors, venture capital, IPOs, and bonds. Factors influencing the choice of capital sources include cost, control, and repayment terms.
Step-by-step explanation:
Essentials of Corporate Finance
Financial capital is essential for companies to fund operations, invest in technology, and pursue expansion opportunities. Financial capital represents the funds necessary to run and expand a business and can come from various sources. It is different from profits, which are earnings after expenses have been covered. Profits may be reinvested into the company, but they are often insufficient for significant growth initiatives, leading companies to seek external funding.
Common Ways to Raise Financial Capital
Start-up firms often raise capital through means such as angel investors, venture capital, and crowdfunding. As they establish a track record and reliable revenue streams, they may opt for an Initial Public Offering (IPO), where they sell shares to the public.
Constraints of Using Profits
Using profits alone limits rapid growth because reinvestment of profits is often slower than acquiring external capital. External investors bring in large sums of money that can be put to work immediately.
Lending to Established Firms
Banks are more willing to lend to well-established firms due to their financial stability, track record, and lower risk profile compared to start-ups.
Bonds and Corporate Finance
A bond is a fixed income instrument representing a loan made by an investor to a borrower, typically corporate or governmental. Bonds are a way for companies to raise money without relying on bank loans.
Choosing Between Sources of Financial Capital
Firms consider factors such as cost of capital, control over the company, and repayment terms when choosing between sources of financial capital like borrowing, issuing bonds, or selling equity.