Page 89 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.71, # 2, 2014, pp. 81-93

or as debt securities with warrants which enable the venture capitalist to retain creditor status

while having the ability to purchase common stock (Sherman, 2012). Common stock may also

be purchased, however in the early stages this option is not usually selected by venture capitalists

as there are no special rights as are afforded to preferred equity positions (Sherman, 2012).

Aside from external cash infusions, businesses may opt to work with suppliers who will

provide trade credit terms. Many suppliers will sell goods and services on credit to facilitate and

incentivize movement of their product. This benefits the entrepreneur by deferring the required

cash outlay, while increasing the sale ability of the product offered by the supplier. In addition,

prepayments are sometimes negotiated into contracts when there is a large upfront capital outlay

required or when there is a lengthy manufacturing process involved. A firm may require a down

payment of fifty or thirty three percent of a sale, then turn around and use the funds to procure

supplies or inventory to complete the sale. For many firms, trade credit is one of the most

common, easily accessed sources of capital.

With so many funding options available for first-round financing, entrepreneurs must

examine their business needs and weigh the advantages and disadvantages of utilizing various

sources of capital. Depending on the type of business, or industry, ventures will lean more towards

equity financing or debt financing. Some entrepreneurs may wish to retain full decision making

powers, while others need flexibility regarding cash outlays to investors. Firms that create a tangible

product tend to use debt financing, whereas businesses based in research and development or

intellectual property that are less tangible in nature tend to obtain funding through equity

stakeholders. There are many factors that must be looked at to determine the proper capital structure

which will optimize business growth while yielding sufficient benefits for the entrepreneur.

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