For businesses, capital is the money it has available for paying for their day-to-day operations as well as funding future growth. Capital is a very broad term generally conferring benefit or value to the owners. Capital can include items like machinery used in a factory, intellectual property, or financial assets. Money is typically considered to be capital, but capital is usually associated with cash that is used for investing or producing products.
Generally, capital is a critical component of the day-to-day running of a business. And it is also a huge part of financing the business’s future growth. Business capital can be derived from many sources. There are four main types of capital, working capital, trading capital, debt, and equity. A company’s capital structure determines what types of capital it uses to fund business operations.
What is Capital?
Capital is a term used to refer to financial resources a business has that can be used to fund its operations. It can include things like machinery, equipment, cash, and other resources. These are examples of assets that allow a business to continue to produce products or services it can sell to its customers. Capital is a vital source of financing for any type of business since companies need resources to operate.
What is the Purpose of Capital?
Capital is a resource that businesses use to fund the continued production of goods and services for the purpose of turning a profit. Companies use capital to invest in various areas in order to create value. Two examples of areas where capital may be allocated include building expansions and labor. A business or individual invests capital with the goal of earning a higher return.
What are the Major Types of Capital?
The table shows the major types of capital.
|
Type of Capital |
Definition |
| Working Capital | Working capital includes liquid assets that are used to pay for daily obligations. Working capital represents a company’s ability to cover debts, accounts payable, and other obligations that are due within 12 months. |
| Debt Capital | Debt capital is acquired by borrowing. It can be obtained from private or government sources. Companies often borrow debt capital from financial institutions, banks, or issuing bonds. |
| Equity Capital | Equity capital comes from a variety of sources. Usually, it is from public equity, private equity, or real estate equity. |
| Trading Capital | Trading capital requires a lot of money to operate in a way to create money-making returns. It is a term used by financial professionals when referring to making a huge number of trades each day. Trading capital is money allotted to purchase or sell different securities. |
1. Working Capital
Working capital is a company’s liquid assets that are available to be used to fulfill its daily obligations. It is defined as current assets minus current liabilities. When a company has more liabilities than it has assets, it is likely to run out of working capital. Examples of working capital include cash, undeposited checks, money in bank accounts, money market funds, treasury bills, and short-term investments the company is planning on selling within a year.
2. Debt CapitalIt
Debt capital is obtained by borrowing from a financial institution or a bank. Companies also obtain debt capital through government or private sources. Small businesses often use sources of capital such as online lenders, federal loan programs, credit card companies, or even friends and family. In order to obtain debt capital, businesses have to build a credit history. Interest rates will depend on the type of capital the company obtained and its credit history.
3. Equity Capital
Public and private equity is usually structured as stock shares in the company. However, public equity is raised through the stock exchange, and private equity is raised from a group of investors. When investors purchase shares of stock, they are giving equity capital to the company. The biggest chunk of equity capital comes from when the company makes an initial public offering.
4. Trading Capital
It takes a lot of capital to operate a business and to continue creating profitable returns. Trading capital is money that is allotted to a business or an individual to sell and buy securities. InvesInvestors sometimes use a variety of trading optimizations in order to add to their trading capital. Investing Traders need cash reserves to pursue their investing strategies. Large firms allocate large amounts of capital for trading stocks or other assets.
How can Capital grow?
Capital growth is an increase in an asset’s value over time. To calculate capital growth, compare the asset’s current value to how much it cost when it was purchased. Capital growth is often measured on assets such as real estate or equities. Investors use a variety of strategies to encourage capital growth. Portfolios are diversified to help reduce risks. Spreading investments between a variety of asset classes like stocks and bonds helps reduce risks. A strong economy can also encourage capital growth, especially with assets like real estate.
How is Capital used in business?
Companies use capital to pay for their ongoing production, so they can create profit. They also use capital for investing purposes. Companies invest in a variety of areas in order to create value. Two common areas of capital allocation include business expansions and labor. Capital is used to make more money.
What are the examples of Capital?
Listed below are examples of Capital.
- Financial Capital: Financial or investment capital are resources an organization needs to continue to generate revenue. Examples include profits, loans, bonds, initial public offerings, partnerships, and corporate stock.
- Manufactured or Constructed Capital: Manufactured capital includes all the processes and parts that turn materials into actual products. This asset is tangible, and it is the result of human skill and work. Examples include buildings, technology, machinery, energy, tools, transportation, communication devices, and cultivated ecosystems.
- Human Capital: Human capital is a set of resources provided by individuals or groups of people. It is the skills and capabilities to provide economic performance. Examples include education, decision-making, problem-solving, creativity, strength, knowledge, training, life experience, mental well-being, and physical health.
- Social Capital: Social capital includes the resources obtained through larger social media networks ad interpersonal relationships. Examples of social media include bonding social capital where connections are made within a group that shares a sense of social norms, values, and identity. Bridging social capital is another example of social capital which helps connect diverse groups of people.
- Intellectual Capital: Examples of intellectual capital are intangible. It includes information, expertise, competency, and knowledge. It includes things like critical thinking skills, innovative abilities, and problem-solving skills. For businesses, this includes written works, worker handbooks, and patents.
- Natural Capital: Natural capital includes assets that provide material for other types of service. Examples include minerals, plants, soil, and animals.
What are Capital assets?
Capital assets are property that is expected to generate value over a long time. Organizations form a productive base. Some examples include buildings, vehicles, machinery, and computers. A capital asset is expected to provide use for at least a year. It’s not expected that capital assets will be sold as part of normal business operations like inventory. And capital assets are not always easy to convert into cash. Here are a few examples.
- Real Property: Pieces of property such as vehicles, stocks, bonds, and investments are considered capital assets. They are useful for longer than a year and are not intended to be sold. Instead, they will be used in the regular course of business operations.
- Land: Land is a capital asset if it is used to generate revenue. The land is a tangible asset that does not depreciate over time.
- Vehicles: Vehicles used to create value are considered capital assets. The plan is to use them for the purpose of growing and sustaining the business, and they will be in use for more than a year.
- Computer Equipment: When a company buys computers or related equipment solely to use in the regular course of its operation, it’s considered a capital asset. They are not purchased with the intention of selling them for profit. Instead, they are used in day-to-day operations and they are expected to be used for more than one year.
- Machinery: Machinery is a capital asset used to produce consumer goods. It is a tangible asset used to build inventory or add value to the company.
- Capital Leases: A capital lease is a contract. It entitles the renter to temporarily use an asset. For instance, a manufacturing company may lease a piece of machinery to use for constructing products. It can also include leasing heavy machinery, land, or buildings.
Is Capital important in business?
Yes. Capital is important in business for both short-term and long-term operations. For the short-term, capital is useful for funding day-to-day operations necessary to keep the business profitable. For the long-term, capital, such as buildings, can be used as collateral to obtain loans.
What is the difference between Capital and Money?
Capital is a broader term that comprises much more than money. Capital is anything that gives an owner an advantage or value. For instance, an owner has an advantage because of a factory, equipment, or other assets. Intellectual property such as patents is also capital since they give the owner or individual an advantage or a way to make money. Money can be classified as capital, but money is typically used in exchange for goods or investments.
