Capital finance is simply defined as any capital generated that can be used to benefit the business financially and is generated through business operations. There are four forms of capital finance commonly used by businesses to raise money or finances which are ;debt capital, working capital, equity capital, and venture capital.
Debt capital is obtained when one obtains debt, in that one takes a loan. The funds are owed to the lender in which one has entered to an agreement whether verbal or written to pay back the debt in full, installments or with interest earned on it at the end. Types of debt capital one can owe are such as bank loans, lines of credit, credit card debts or leasing. Debt capital is mainly used to fund projects or businesses or investments that have a positive return on interest with time. An active credit history is needed to obtain this kind of funding.
In equity capital, companies do not rely on taking debts and don’t incur interest that is usually coupled with debts. In this form of capital finance, it involves transfer of ownership by selling off some shares to investors to obtain capital for the business. Only a set percentage of shares is sold to obtain the funding. This is a quick method of obtaining cash for the business to fund various projects within it. The benefit that comes with it is it’s a low risk form of raising funds.
Working capital refers to the cash at hand or money available for use in daily business operations. It can be evaluated through the difference between current assets and current liabilities. Working capital is simply the money one has to work with and is an important aspect used in risk assessment when offering loans and a good indicator of the state of the business.
Venture capital is given in exchange for the company’s equity and is provided by private investors. Start ups, small companies, and high growth industries are the main users of this type of capital financing. It is considered as high risk as there is no financial security for the funds being offered. The investors simply believe in the potential of the business and fund its growth so that in future they can have returns on the investment they made. Find out more at blog.cfi.co.
Different businesses are the ones to decide on which type of finance they need to fulfill their business needs and achieve funding to help their business thrive and grow. They also need to understand that capital comes with a cost. Click here for more info: https://en.wikipedia.org/wiki/Financial_capital.