Part I treated the factors that bear on the willingness of individuals to try entrepreneurship. In part II, we recognise that sometimes individuals have limited opportunities to become entrepreneurs, because of difficulties raising sufficient finance to purchase the working capital, marketing services, initial living expenses and other miscellaneous requirements needed to establish a business.

Most start-up finance in developed countries tends to be personal equity (‘self-finance’), i.e. finance supplied by the entrepreneurs themselves. For example, according to the Bank of England (2001), 60 per cent of start-up businesses in Britain use self-finance. The remaining funds are raised from external sources. According to the Bank, about 60 per cent of external finance is raised through debt-finance contracts (comprising overdrafts and term loans) followed by asset-based finance (e.g. leasing: around 20 per cent). A similar picture applies in the USA, where banks also issue most debt finance. Also important is family finance, at around 10 per cent of external finance on average, whereas venture capital (equity finance) tends to play only a very minor role for most entrepreneurs (between 1 and 3 per cent). This chapter focuses on the implications for entrepreneurship of raising debt finance. Chapter 6 deals with various other sources of finance.

If lenders and entrepreneurs were both perfectly informed about all aspects of new entrepreneurial ventures, and if financial markets were flexible and competitive, then all ventures with positive net present value (npv) would be funded. Also, it would not matter if lenders or entrepreneurs undertook the ventures.