The Canadian entrepreneur in the Investment Industry: A Top-Down View chapter initially financed her company with her own money and that of family and friends. But over time, the company needed more money to continue to grow. The company could get a loan from a bank or it could turn to investors, other than family and friends, to provide additional money.

Companies and governments raise external capital to finance their operations. Both companies and governments may raise capital by borrowing funds. As the following illustration shows, in exchange for the use of the borrowed money, the borrowing company or government promises to pay interest and to repay the borrowed money in the future.

The illustration has been simplified to show a company borrowing from individuals. In reality, the borrower may be a company or a government, and the investors may be individuals, companies, or governments. Companies may also raise capital by issuing (selling) equity securities, as discussed in the Equity Securities chapter.

As discussed in the Quantitative Concepts chapter, from the borrower’s perspective, paying interest is the cost of having access to money that the borrower would not otherwise have. For the lender, receiving interest is compensation for opportunity cost and risk. The lender’s opportunity cost is the cost of not having the loaned cash to invest, spend, or hold—that is, the cost of giving up other opportunities to use the cash. The various risks associated with lending affect the interest rates demanded by lenders.