Labor does all the work - why do we need capital?

Starting a business without outside capital is called 'bootstrapping' [from 'pulling yourself up by the bootstraps'] and it is notoriously difficult.  The problem is that in any reasonably complex business there is a lag between the time people get together to work to build a new business and the time that revenue or income gets generated from that business.  And during that time, people need to get paid, rent needs to be paid; office expenses, manufacturing expenses, sales expenses etc. all are accruing before there is any money to pay them.  Getting that money in advance from somewhere is called 'financing' the business.

Different kinds of business require different kinds and amounts of financing.  A guy building an iPhone app might work at night or on weekends or live at home with his parents and not need anything much in the way of financing.  Building a pharmaceutical company, or a car company, could require up to a billion dollars.  There is a finance market just like there is a supermarket - you can shop for the amount and kind of financing that is suited to your business.

Share this