Capital is either raised from debt or equity. There are hybrid instruments and government grants that muddy the waters because they contain a mixture of each source of funding. By and large, capital is readily identified as debt or equity.
The first sources of capital to consider are internal ones: for example, loans or equity contributions from family. Then, external sources of capital: typically, debt (usually borrowed money) or equity sources (investors contributing in exchange for a share of the enterprise). Finally, alternative sources include franchising, licensing, government grants and other means including financing and crowd-sourced funding, as well as the hybrids such as some kinds of preference shares.
What are internal sources of capital?
Internal sources of capital are those generated from either the business itself or the owner-manager. Where an ownerinvestor is able to inject further capital into the business, usually they do so from personal sources. This often occurs in smaller businesses, including family businesses. Doing so, including where additional capital is contributed by family and/or close associates, may place undue pressure on finances should the investment fail. This is because a high level of investment concentration is made on a single investment and, in the absence of diversification of capital resources, will inevitably cause significant stress in the event that the investment fails.
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