Definition of Capital Financing: The word capital stands for financial assets, including the funds accommodated in the deposit accounts or/and funds received from a particular source of financing. One can also connect it with capital assets of a firm which needs a notable amount of money to expand or finance.
Capital can be raised from equity or debt financing or held through commercial assets. Businesses generally focus on three main types of business capital: equity capital, debt capital and working capital. Usually, the business capital is the primary component for running a firm and commercial capital concentrated assets.
The capital assets are the securities of a firm usually seen on either the long-term or current part of the balance sheet. It includes cash equivalents, cash, and marketable securities along with the production facilities, storage facilities and manufacturing equipment.
The overall physical capital at a particular time reflects the capital stock (different from the capital stock of a firm entity). Capital assets, capital goods or real capital are prior manufactured non-financial securities or durable items which contribute to the production of services and goods. In Marxian economics, capital refers to the money used to purchase something with a view to resell it for earning profit.
Business Capital Financing Structure
Every business requires a particular value of capital to create and operate on profitable returns. The evaluation and reviewing a firm’s capital is done through the analysis of the balance sheet. The division between liabilities, equity and assets, a firms’ balance sheet gives a metric summary of a capital structure. Debt investment produces a cash capital security which must be repaid over a fixed duration with the help of scheduled liabilities.
Equity investment gives cash capital which is also mentioned in the equity column of the balance sheet with an assumption of a good return for the shareholders who are investing. Debt capital generally gives a lower value of relative rate on the return along with the strict terms for repayment. Some of the primary metrics for evaluating the firm’s capital include debt to equity, weighted average capital cost, return on equity and debt to capital.
Types of Capital Financing
Here is the list of top four categories of capital:
1. Debt Capital
A firm can obtain money through the hypothesis of debt. Debt capital can be received from the government or private sources. Sources of capital include things such as online lenders, family, friends, credit card firms, financial institutions, federal loan, schemes and insurance firms.
Companies and individuals must have an active history in credit to get debt capital. It requires timely repayment of some portion of money with interest. Interest changes depending on the borrower’s history of credit and type of capital received.
2. Equity Capital
It can come in various forms. Generally, there are distinctions between real estate equity, private equity and public equity. Public and personal equity is generally in the form of stocks. The increase in public security capital occurs when a firm list on the available exchange market and gets equity money from shareholders. This type of equity is not upraised in the public financial markets and generally comes from selected owners and investors.
3. Working Capital
It includes the most liquid capital securities of a firm which are available for meeting daily its necessities. It can be measured by the by using the following two formulas:
Current securities – Current liabilities
Inventory + Accounts Receivable – Payable accounts
Working capital calculates a firm’s short-term liquidity. In more specific terms, it reflects the capacity of a firm to cover its accounts payable, debts and other necessities which are due within a year.
4. Trading capital
This type of capital that may be held by companies or individuals who place a high number of trades daily. Trading capital reflects the volume of money allotted to purchase and sell different securities.
Traders may try to enhance the value of their trading capital by applying various methods used for trade optimisation. These ways try to create the best utilisation of capital by estimating the ideal percentage of money to invest in each type of trade. Notably, investors need to evaluate the optimal value of cash reserves for successful investing.
Money vs Capital
While considering both terms, the capital is nothing but money. However, for commercial and business objectives, capital is generally seen from an investment or operational view. It comes typically with a cost.
Concerning the debt capital, this means the amount of interest required to pay off the debts. For equity capital, it means the amount used for distribution by the shareholder. In all, it is used to shape a firm’s growth and development.