THE IMPORTANCE OF DEBT
CAPITAL TO SMALL BUSINESS
Obtaining investment capital is one issue faced by the small and/or fledgling company. It is only one of many, and may not be the most important challenge in many situations. Or, it may become the critical issue only after other preconditions are met, such as the adequate skill and emotional readiness of the business's principal entrepreneurs. Yet, capital is important to small business success and is particularly challenging for reasons that will be described.
The purpose of this chapter is to provide the context for understanding the importance of small-business, debt capital formation. The chapter has four parts that lead from the general setting to specific issues. The first section provides a general understanding of capital formation and its importance to small business. It starts with a discussion of the financial intermediary system. The section relates the need for small business financing and then describes the difficulty current systems have in making that kind of capital available. The second section investigates the role of capital formation for business incubation. The third section focuses on debt capital as one aspect of capital formation, and the fourth section states the need for governmental involvement in capital formation and what form it should take. This chapter prepares the reader for the discussions of specific governmental interventions presented in Chapters 3 and 4.