Capital refers to the financial resources that businesses can use to fund their operations like cash, machinery, equipment and other resources. These are the assets that allow the business to produce a product or service to sell to customers.
This is a vital source of financing across all types of businesses because companies need these resources in order to operate. Businesses raise capital by issuing stocks and bonds to investors who purchase these financial instruments with cash or other assets. It’s important to distinguish money from capital because they aren’t the same thing. Capital is more durable than money and is used to produce something and build wealth. Property rights give capital it’s value and allow it to generate revenues and build wealth. Equipment, machinery, patents, trademarks, brand names, buildings, and land are a few examples
Ana is the CEO of a large conglomerate that has various business lines in the insurance and energy industries. Her company wants to build a new energy plant that will need to be funded in the next year. A majority of her managers have come to her with multiple proposals for a total of $100,000,000. This is an extremely large expense that has to be funded this year in order to expand operations. In order to fund this, Ana must use a variety of resources including the cash and short-term investments that the company holds as well as sell company stock to new investors.
Types of Capital
A business can acquire capital by borrowing. This is debt capital, and it can be obtained through private or government sources. For established companies, this most often means borrowing from banks and other financial institutions or issuing bonds. For small businesses starting on a shoestring, sources of capital may include friends and family, online lenders, credit card companies, and federal loan programs.
Equity capital can come in several forms. Typically, distinctions are made between private equity, public equity, and real estate equity.Private and public equity will usually be structured in the form of shares of stock in the company. The only distinction here is that public equity is raised by listing the company’s shares on a stock exchange while private equity is raised among a closed group of investors.
A company’s working capital is its liquid capital assets available for fulfilling daily obligations. It is calculated through the following two assessments:
- Current Assets – Current Liabilities
- Accounts Receivable + Inventory – Accounts Payable
Any business needs a substantial amount of capital in order to operate and create profitable returns. Balance sheet analysis is central to the review and assessment of business capital. Trading capital is a term used by brokerages and other financial institutions that place a large number of trades on a daily basis. Trading capital is the amount of money allotted to an individual or the firm to buy and sell various securities.
Capital vs. Money
At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment. For equity capital, this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company’s development and growth.
In a nutshell:
- The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
- The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
- Any debt capital is offset by a debt liability on the balance sheet.
- The capital structure of a company determines what mix of these types of capital it uses to fund its business.
- Economists look at the capital of a family, a business, or an entire economy to evaluate how efficiently it is using its resources.