Accounting For Dummies®, 4th Edition

8.1. Studying the Sources of Business Capital

Every business needs capital. Capital provides the money for the assets a business needs to carry on its operations. Common examples of assets are the working cash balance a business needs for day-to-day activities, products held in inventory for sale, and long-life operating assets (buildings, machines, computers, office equipment, and so on). One of the first questions that sources of business capital ask is: How is the business entity organized legally? In other words, which specific form or legal structure is being used by the business? The different types of business legal entities present different risks and offer different rewards to business capital sources.

Before examining the different types of business entities in detail, it's useful to look at the basic sources of business capital. In other words, where does a business get capital? Regardless of the particular legal structure a business uses, the answer comes down to two basic sources: debt and equity. Debt refers to the money borrowed by a business, and equity refers to money invested in the business by owners. Making profit also provides equity capital. No matter which type of business entity form that it uses, every business needs a foundation of ownership (equity) capital to persuade people to loan money to the business.

I might add that in starting a new business from scratch, its founders typically must invest a lot of sweat equity, which refers to the grueling effort ...