Topic 3.5 · Financial Capital
Financial Capital
Why businesses seek outside money, loans vs. equity, bonds and stocks, risk and return for lenders and investors, and pitching for funding.
Learning objectives
- 3.5.AExplain why businesses seek external financial capital.
- 3.5.BDetermine potential sources of financial capital for a business.
- 3.5.CDescribe potential benefits and risks to lenders and investors who provide financial capital to businesses.
- 3.5.DDevelop and evaluate a pitch to prospective lenders or investors.
Objective statements © College Board, quoted from the Course and Exam Description.
Why seek outside money?
Many entrepreneurs start by bootstrapping with personal savings, personal bank loans or personal credit. They seek external financial capital when their own funds can't cover startup and operating costs long enough to reach break-even.
The denominator is the contribution margin per unit, the amount each sale contributes toward covering fixed costs. Try it in the Break-even calculator.
Established businesses seek capital to develop new products, replace fixed assets, , and , because revenue can arrive irregularly while expenses must always be paid.
Key terms
- Financial capital
- Money (cash) used to start, run or grow a business.
- Bootstrapping
- Funding a startup with the founder's personal savings.
- Break-even
- The sales level at which total revenue covers all costs for a period.
- Equity financing
- Raising money by selling ownership shares, which cedes some control and future profit to investors.
- Bond
- A loan from an investor to a business (or government) that pays interest.
- Stock
- An ownership share in a corporation, sold privately or publicly.
- Dividend
- A shareholder's share of profits paid out by a corporation. Not all corporations pay them.
- Capital gain
- Profit from selling an asset for more than its purchase price.
- Rate of return
- (Income + capital gain) ÷ price of the asset, expressed as a percentage.
- Risk tolerance
- Willingness to take financial risk. Riskier investments must offer higher expected returns.
- Valuation
- An estimate of a business's economic worth, used to price ownership shares and judge repayment capacity.
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