When it comes to business there are several ‘capital’s we can talk about. A dictionary definition of the term is assets available for use in the production of further assets. That suggests that capital can be in many different forms. In this article, I will substantially look at just two of them – financial capital and social capital. I am aware that the former tends to be put at the forefront whilst the latter is at times given scant attention. By the end of this article, my wish is that you would have developed a balanced appreciation of these two components.
This is the obvious one and the most sought-after. By the way, financial capital refers to mainly money or credit that is used to finance a business. Financial capital is needed for many contexts but here I am zoning in on the business side. Why is it so important though?
A Huge Determinant
The sole reason why most businesses never see the light of day is financial capital. Many aspiring entrepreneurs actually never act upon their business ideas because of lack of it. Many borrow or take loans to finance their businesses. However, many more cannot afford to or do not even qualify to apply for them. Thus without even looking at other variables the availability or non-availability of financial capital can determine whether or not a business is born.
Big Implications On Business Progression
How you get financial capital for your business will majorly inform how it will progress. In a few moments, I will cover some ways you can use to raise financial capital. You will be able to connect the dots to see how they variably affect subsequent business progression. If you did not manage to acquire enough it will mean your business will tread using a lean budget. That will mean limited capacity, limited revenue, and limited growth. Who you got the financial capital from, how you got it, and the terms of the agreement will also affect how your business progresses.
How To Raise It
The question of how to raise financial capital is an interesting one. Conventional wisdom usually suggests that it is inevitable to take out a business loan. Personally, I strongly disagree with the notion of taking out loans from financial institutions. The fact that most prospective entrepreneurs have no access to lines of credit due to for instance collateral issues is a blessing in disguise to some extent. Wherever possible, I urge you to avoid taking out loans from financial institutions. Let us briefly explore two of some of the ways:
Here I just want to highlight two major ones i.e. venture capitalists and angel investors. It is advisable to only deal with venture capitalists when you are undoubtedly sure your business will rake in revenue and profits as soon as possible. This is because venture capitalists are all about making money i.e. returns on their investment. Thus you must be sure! Getting financial capital from an angel investor would be most preferable as it eliminates the pressure of paying back.
Bear in mind that those two options can be in the form of professional entities or from your immediate social sphere of influence. By that, I am referring to family, friends, and relatives. I do encourage the utmost discretion to be exercised when dealing with these people. Bad blood scenarios and even murders can culminate from fallouts later.
This would be the best option, funds-permitting. This is because you will be baring the risk all by yourself. If you fail then you will not have to stress due to the involvement of owing other people. Most people are in a rush to start a business and never carefully consider this option. They quickly write it off by bemoaning their already inadequate incomes. However, you can dedicate time to raising funds for your business. I know of someone in the USA who spent almost 3 years saving up for their business idea. They successfully launched it later, with their own money, and today they are a notable fashion entrepreneur. I actually believe this should be your first stop before exploring other options – raise your financial capital from your own pocket.
Ultimately that is why in a previous article I emphasised the importance of studying financial literacy. Financial decisions can have big implications on how your personal or business life turns out. Almost always the number one reason businesses fail is related to financial capital.
A dictionary definition of this is the sum total of the networks of relationships among people who live and work in a particular society, enabling that society to function properly. Often time social capital is regarded as secondary to financial capital yet it should not be. At the core of all human endeavours, I strongly affirm that social capital takes pre-eminence. Let me give an example:
Several years ago I had the epiphany that I had to start a chicken poultry project. This was because I had been inspired by someone whose project I had visited before. I remember drafting a business plan that I was going to use to source financial capital for the project. It was a detailed business plan with all the financial projections and all. The first person I approached to ask for a loan was that person. They were impressed by the business plan and agreed to give me the money. However, later on, they said I did not have to pay back – it was about US$800. I managed to get financial capital I did not have to pay back because this someone was someone I knew and closely interacted with. That is the essence of what social capital can bring you.
My emphasis is that you should cultivate social capital more than anything else. Even your chances of securing financial capital can be enhanced by the worth of your social capital. As someone once said, ‘your network is your net worth’.