Steps to Growth Capital Self-Study GuideStep 2

2.2 Understand Conventional and Risk Financing

You have two basic external funding sources: conventional capital and risk capital. Each option bears a different cost. And risk is the key to determining what the cost will be to finance your growing business.

Conventional sources lend at lower rates but impose restrictions to lower the lender's risk. So, for example, when you seek capital from banks and other conventional sources, you may find constraints placed on your borrowing. Maybe the size of your operating line of credit will be restricted, or the amount of your term debt will be limited.

Risk capital sources will fund businesses that conventional sources will not finance. But they will only do so for a price. They will expect a higher rate of return to compensate for the higher risk.

Risk and Rate

Simply put, risk and rate (that is, rate of return for the investor) go hand in hand. As risk goes up, so does the rate. Why? To compensate for the investor's additional risk. And a higher rate of return means a higher cost to you, to finance your investment needs.

Using the types of external financing, see how risk and returns are related.

Check It Out

Check your understanding of risk, return and funding options by answering these questions.

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