Last editedJun 20212 min read
In business, capital means the money a company needs to function and to expand. Typical examples of capital include cash at hand and accounts receivable, near cash, equity and capital assets. Capital assets are significant, long-term assets not intended to be sold as part of your regular business.
What is capital in business?
The main types of capital in business are:
Share capital or venture capital
What is working capital?
Working capital refers to a business's liquid resources such as cash and current assets. It takes its name from the fact that working capital is, essentially, what a business needs to keep working. For example, working capital is used to pay employees and suppliers.
Working capital is generally calculated in one of two ways.
Current Assets minus Current Liabilities
Accounts Receivable plus Inventory minus Accounts Payable
What is trading capital?
Trading capital is only relevant to certain financial services companies, for example brokerages. It refers to the amount of money allocated to each trader.
What is debt capital?
Debt capital refers to the funds raised from debt such as bonds and regular loans. It is considered capital because it does provide resources the business can use. It is also a liability because the funds will eventually need to be repaid, usually with interest.
What is share capital or venture capital?
Share capital and venture capital are essentially the same and are generally used at different stages of a business's growth. Share capital is capital received through investors buying shares in a business on a public stock exchange. Venture capital is capital received from private investors operating outside of a stock exchange.
What is equity capital?
Equity capital is capital derived from capital assets. Capital assets can be both current and long-term. Even if they are technically current they are likely to be illiquid, meaning they are likely to be difficult to sell quickly. What’s more, the business might not be able to sell them without affecting its operations.
However, there are often ways to monetise capital assets, at least to some extent. For example, capital assets could be used as collateral for business loans. It might also be possible for a business to lease or licence its capital assets without affecting its own operational needs.
What does capital mean for business?
In practical terms, capital is what keeps businesses in operation. It also enables businesses to expand. On a broader level, a business's capital structure can provide a lot of useful information about its current status and future prospects.
For listed companies, information about a business's capital structure will come from the balance sheet. Investors look for key ratios such as debt to capital, debt to equity, weighted average cost of capital and return on equity. Unlisted companies might still want to produce a balance sheet or similar records to show to potential lenders (or venture capitalists).
In simple terms, the more a company can generate capital from its own resources, the more attractive it is to investors. In the real world, however, it is very common for companies to raise capital through debt. This is perfectly acceptable as long as two conditions are met. First, the capital has to be used effectively. Second, the business has to be able to manage the repayments comfortably.
It is also common for companies to raise capital through investment. From the perspective of the company, the advantage of this is that the funds do not have to be repaid. The potential disadvantage is that it entails the owners of the company giving up some of their ownership rights. From an investment perspective, investors should be able to expect a decent return on their investment funds.