Types of Capital and How to Generate More of Them
There are a number of different types of capital that you'll need in order to ensure the success of your startup or small business. Following are six different types of capital that you can use.
What Is Capital?
Capital is a broader term that encompasses more than just "money" or "funds." Capital refers to anything that can be used to generate revenue from your business.
When thinking of capital, most entrepreneurs and business owners think of financial capital. Different types of financial capital will be discussed in this article, but it's also important to remember that other types of capital can be just as important to your success.
Debt capital is one of the most common forms of financial capital. It refers to funds that were borrowed in one way or another.
These loans usually come with a requirement to pay back interest, which is the cost of using this form of financial capital. However, depending on the interest rate, your cost may be quite low.
Debt capital is one of the most common ways to fund a business and generate revenue and a positive cash flow. Examples of debt capital are loans from banks or corporate bonds.
Equity capital is another common form of financial capital. It refers to funds that investors give you in return for shares in your company.
Unlike debt capital, equity capital does not have to be paid back. On the other hand, there is the responsibility of providing your investors with a profitable return in order to keep them happy. Investors are risking more than lenders, as loans must be paid back even if a business is not profitable.
Equity capital can be obtained from individual investors, partner firms, venture capitalists, angel investors, or through an IPO.
Other Forms of Financial Capital
Other forms of financial capital exist as well. For example, once you build relationships with suppliers (see social capital below), they may supply you with goods with the option of partial or delayed payment. With supplier financing, suppliers can sell their invoices to banks at a reduced price to get their money quicker, while giving receivers more time to pay (another form of capital).
Working capital is an estimate of the current resources a business has at its disposal. This is determined by subtracting your liabilities from your assets. Another way of measuring working capital is through a ratio of assets vs liabilities. If your ratio is less than 1:1 (liabilities:assets), you are in quite a bit of trouble. If it's too high, on the other hand, you're probably missing out on potential growth by not investing available assets. The exact ratio you need to succeed will depend on your costs and your growth plan.
Human capital refers to your human resources. This is hard to measure tangibly, but it generally refers to how many employees you have and the quality of your employees. You need to take into account things such as skills, training, dedication, motivation, and so on. Human capital is often dependent on having enough financial capital to pay your employees.
Social capital refers to your relationships with other business owners, investors, suppliers, manufacturers, and other influential people in your industry. Quality relationships will prove essential for succeeding in your niche.
How to Generate Capital for Your Business
Generating financial capital is as easy as finding a trusted lender. Nowadays, this can be done online through an easy process. Just go to our website, answer some questions about yourself and your business so we can match you with a trusted and reliable lender, fill out a form, and request your loan.
Lincoln Savings Bank, Member FDIC
Want the latest and greatest from our blog straight to your inbox?