Even a kid would tell you that no one can think of starting a business if they don’t have any money available to fund it. In order to start and run a business enterprise, you need funds that would take you and your business a long way. These funds that sustain your business are collectively called your business capital.
In simple words, business capital is a combination of financial assets that help your business function smoothly. These are the assets that you require at every stage of your business, on a daily basis.
There are several divisions and bifurcations of business capital, but the one made on the basis of ownership is the most basic and the most important to understand for any budding entrepreneur. On the basis of ownership, business capital can either be owned or borrowed.
These funds come into the picture when the business is about to be launched and hold their importance till the venture is dissolved/shelved.
Borrowed capital, as the name suggests, comprises of sources of finance that are borrowed by the business and are to be paid after certain period of time.
These sources majorly include the issue of debentures and loans. Debentures are issued against the security of certain assets. Loans taken by the business can further fall into one of the following categories:
- Long term loans (for acquiring fixed assets)
- Short term loans (for funding liquid assets and day-to-day business activities)
On the other hand, owned capital consists of funds owned by the people who have a stake in the business. Unlike the borrowed capital, owned capital is not supposed to be paid back to anyone as the stakeholders themselves have invested funds, and also the returns on this investment are highly subject to the market conditions.
Owned capital can be further divided into the following categories:
- Equity Capital– This is the capital raised by dividing the total capital into shares and selling them to the public in order to make them the stakeholders. This investment has the highest potential of getting favourable returns depending on the market conditions. However, you may also lose your and your stakeholders’ money if your business stops making profit, as the equity shares are paid off in the end after making all the necessary deductions.
- Preference Capital – This is the capital raised by selling preference shares of your company. These shares differ from the equity shares on the basis that they are given higher preference as compared to equity shares invested by the stakeholders. When a company makes profits, preference shares are paid off before the equity shares and when a company winds up, people holding preference shares are paid off their dues before the ones holding equity shares.
- Retained Earnings – This majorly comprises of the money saved out of the profits made by the business that you’d want to re-invest for the firm’s well-being. This is as good as an individual saving money and using that money to buy something for them. Retained earnings largely constitute of the profits ploughed back by the firm in order to invest back into the business.
Owned capital holds a lot of importance in the working of a firm as it is directly paid by the company stakeholders. Here are two major advantages of having a decent owned capital raised for your business enterprise:
No Economic Pressure
There is no economic pressure on the company and people running it as in the case of owned capital, dividend is paid only if the company makes profits. As the stakeholders of the firm are liable for any loss that the venture makes, there is no dividend distributed of the business doesn’t make profits.
On the other hand, a business enterprise is bound to pay the borrowed capital back to their sources when payment is due, irrespective of the profit earned by the company.
Acquiring Fixed Assets
As you are under no obligation to pay back the funds acquired through the owned capital, you can use the same for acquiring fixed assets such as land, machinery, office premises and so on. However, the fixed asset requirements are usually very high for a business firm. I
n case you are not able to fulfil them using your owned capital, you can approach lending firms and acquire asset finance to fund your needs.