7 - Debt finance for entrepreneurial ventures
Published online by Cambridge University Press: 05 June 2012
Summary
Part I of this book explored various factors that bear on the willingness of individuals to try entrepreneurship. Part II recognises that sometimes individuals have limited opportunities to become entrepreneurs, because of difficulties in raising sufficient finance. Finance is needed to develop prototypes, purchase working capital and marketing services, and defray initial operational and living expenses.
Most start-up finance in developed countries is in the form of personal equity (‘self-finance’), i.e. finance supplied by the entrepreneurs themselves. According to the Bank of England (2001), 60 per cent of start-ups in Britain use self-finance. The remaining funds are raised from external sources. According to the Bank, about 60 per cent of external finance is raised through debt-finance contracts (comprising bank overdrafts and term loans) followed by asset-based finance (e.g. leasing: around 20 per cent). A similar picture applies in the USA. Also important is family finance, at around 10 per cent of external finance on average, whereas venture capital (equity finance) tends to play only a very minor role for most entrepreneurs (between 1 and 3 per cent on average). This chapter focuses on the implications for entrepreneurship of raising debt finance. Chapter 8 discusses various other sources of finance, including venture capital.
If lenders and entrepreneurs were both perfectly informed about every aspect of new entrepreneurial ventures, and if financial markets were flexible and competitive, then all ventures with positive net present value (NPV) would be funded.
- Type
- Chapter
- Information
- The Economics of Entrepreneurship , pp. 203 - 233Publisher: Cambridge University PressPrint publication year: 2009