If you run a business, a solid understanding of capital is vital to ensure your company has the funds to expand profitably. What is capital in a business? In plain terminology, capital is a financial source enterprises rely on to fund their operations and other company-related necessities.
Some examples of capital for businesses include cash-on-hand, stocks, bonds, property, plant, and company equipment, and any asset that generates long-term value for your organization. As a wealth measurement, you can generally break business capital down into three types:
- Working capital
- Debt capital
- Equity capital
If you’re still fuzzy about the term, don’t worry. Here, we unpack what you need to know about capital in a business—including the three core types and what they produce in business growth—and how much capital you’ll need to sustain your business.
When you’re ready, you can free up capital and access equipment for your business via Clicklease’s fast-yet-secure process, immediate decisioning, and personalized payment options.
What does having capital mean in a business?
Capital for a business means having the financial resources to fund your business growth and ensure its long-term success.
Capital can represent assets or anything that generates revenue and value for a company over time. These can include products, stocks, property, plant, and even bonds.
What is capital used for in a business? Consider all the expenses involved in running a business. At the very least, most companies must account for:
- Rented space
- Utilities
- Office equipment
- Hiring and onboarding costs
- Supplies
- Employee wages
- Marketing expenses
You can use equity capital as economic leverage to fund necessities without drowning in debt. Equity capital also puts your business in a better position to make heavy financial decisions, such as financing equipment while staying within budget. With proper funding, a company owner can meet financial obligations, and their business will thrive in the competitive global marketplace.
Here are the three types of capital business owners should be aware of:
1) Working capital
Working capital is anything a business needs to keep its services running. As a financial metric, working capital represents a company’s liquidity—the ability to cover current business liabilities.
What is the importance of working capital in a business? Working capital helps determine whether a company has enough money for future activities and other obligations, such as payroll, interest payments, and taxes.
A company with negative working capital carries higher liabilities than assets. The good news is that the math for determining working capital is straightforward: subtract your current liabilities from your current assets. Additionally, you can also subtract your accounts payable from your accounts receivable to determine current ratio.
2) Debt capital
Debt capital refers to any capital or funds raised by borrowing money from either lenders or investors. More specifically, it’s a funding source where companies rely on loans, bonds, or other financial sources they must repay within an agreed upon time frame.
Companies must repay debt capital since it’s a corporate loan. Debt capital can also be:
- Lines of credit
- Installment loan
- Merchant cash advance
- Small Business Administration loans
Businesses must carefully manage debt capital to prevent company finances from deteriorating due to higher interest rates. As a business must repay the borrowed funds by an established period, debt capital is considered a liability for the company.
3) Equity Capital
With equity capital, businesses obtain funds from investors in exchange for a portion of company ownership.
Remember that investor ownership of some company shares means investors have some control over the business they invest in. Depending on how long you’ve been in business, you can attract many types of investors for equity capital, including:
- Owner-funded
- Individual investors
- Partner-funded
How does capital affect a business plan?
Understanding how capital is distributed, the requirements, and how to manage your capital properly will prepare you for financial hiccups. You’ll be in a much better position to determine the current value of your business—and objectively consider the proper solutions to ensure its growth.
For example, if you plan to expand your business by opening a new location, you must acquire additional capital to fund your new facility. A cash flow plan will make paying for property rent, insurance, and hiring costs easier. Acquiring additional capital boosts your opportunities to meet customer demands without diminishing your financial positions.
What are capital requirements in a business?
Capital requirements determine how much money you’ll need to cover all your equipment needs and expenses to reach a desired profit. If you operate in an industry with a significant risk of financial loss, understanding how much capital you need will help you make informed short and long-term financial decisions.
To accurately assess your requirements, add up all your start-up expenses and current investments. Then, subtract the projected cash flow from operations to determine how much external capital your company needs.
If you’re kicking off a start-up, determining your capital requirements can get tricky. You’ll need to forecast an accurate budget that incorporates all your projected expenses and revenues. To get started, add up the one-time and recurring expenses you have (and will have), including:
- Initial costs: Expenses such as business licenses, supplies, and permits are all initial expenses because you use them to start your business.
- Fixed Costs: Costs that remain constant, including rent, utilities, association fees, and equipment inventory.
- Variables: Variable costs change depending on production volume. Some examples of variable costs include materials, production supplies, shipping fees, and commissions.
If your projected expenses exceed your projected revenues, additional capital will be required to maintain operations. Equipment for your business can require an initial cost, ongoing maintenance, and more. Get started and find a solution that works for you, such as paying for business equipment as you go.
Lease business equipment with Clicklease
If you need effective leasing solutions to fund your business, Clicklease can lend a helping hand. We assist companies of all sizes, including small businesses, by leasing them equipment that enables or facilitates building production capacity without using capital. Small businesses can move forward with the right lease via a fast-yet-secure process, instant approval, and personalized payment options.
Learn more about the options available to your business today.
