Capital funding is the finances that investors and lenders give an enterprise to take care of its everyday needs. The capital that a company runs on consists of both stock, which is also known as equity, and loans. Equity and debt represent various kinds of capital funding. Lenders may provide advances to a business to fund its infrastructure but will want that the money to be paid back promptly.
For equity investors, interested persons buy shares or equity, and expect that the shares that they hold will grow in value. Both debt and equity provide offer businesses the working capital which they need to finance their everyday operations and meet the objectives which they were set up to achieve. However, equity holders will demand a piece of ownership of the company from its original owners and founders, but the debt owners will not.
What can a business use capital funding for?
A business can use capital funding to finance a wide range of its activities which include office expansion, purchase of business assets, mergers, buyouts, and marketing campaigns that increase market penetration into new territory. It’s imperative for the business that receives capital funding to ensure that it can convert that money into something that is more useful and which adds value in the short and long term respectively.
3 Types of Capital Funds
Capital funding is categorized into three main types: venture capital, debt, and equity.
1. Equity capital
This is the money that a business gets from its shareholders and investors, and it’s not always paid back. However, it’s expected that the value of the company’s stock will rise and the shareholders can get dividends from a share of the company’s profits. This kind of financing helps to minimize the debt financing that a company can use, and so there is no pressure when it comes to repayment. There are no deadlines to pay, and even when losses are made, the business will not be under pressure to pay.
2. Debt Capital
These are the funds that are sourced from lenders and the business is supposed to pay back an agreed amount, which comprises a part of the principal amount plus interest. Credit financing is easy to get when compared to equity financing, and if used well, debt capital helps to boost the profitability of a business within a short time.
However, the firm will be required to commit itself to pay g off the loan within a certain time frame. In case the business operation suffers some unexpected setbacks, this can become a serious challenge for the business.
3. Venture capital
This kind of business s funding is mostly available to startups and firms at the early stages. Venture capitalists mostly choose to invest in new business that has high risks and also high upsides. The investors’ hopes to gain back by profiting from diverse portfolios which include an increase in the value of the company’s shares.
Venture capital provides a company with a means to send its growth to an overdrive. The venture capitalists have the expertise to streamline the operation of the startup, its processes and ensure that it has the infrastructure that it needs for faster growth.