Capital is the term used to describe any financial resource used for business investment. Some types of capital can be borrowed from other sources, while others are produced by the efforts and profits of the business. It can come in many forms. There are types of capital markets used by businesses that earn income, as well as types of capital made available by the government. Businesses also create their own types of capital through the use of credit and property owned. The government, through programs such as the TANF (Temporary Assistance to Needy Families) and the FAFSA (Free Application for Federal Student Aid), can also provide some types of financial aid for students who may not otherwise be able to afford to finance their education.
Types of Capital. The three basic types of capital are hard money, personal assets, and non-recourse debt. Hard money is any cash that is invested in a business and is usually raised through borrowing. Borrowing for any purpose including business financing requires that the venture is successful enough to generate future income from the funds borrowed.
An example of a hard-type of capital is fixed assets. These are generally products or accounts receivable. These types of capital are normally long-term investments. Examples include inventory, depository receipts, furniture, raw materials, and patent pharmaceuticals. A company’s retained earnings is another type of fixed capital, which most often is used to make payments on accounts payable.
A type of capital that is frequently used by private companies in their business financing transactions is short-term debt. This refers to a loan that is paid back within a specific period of time. The term of the loan is typically four to five years; however, it may be paid down to a shorter length in some instances. Another type of capital used in financing transactions rights provided by stocks, partnerships, or mutual funds.
A third type of capital is equity. This represents the value of the total equity of a company. Common equity includes common stock and preferred stock. Other types of equity include common equity lenders and preferred equity syndicates. A company’s retained earnings is yet another type of equity; this type of equity is not closely related to the ownership structure of a company, but is rather a derivative.
The types of capital available in capital markets depend upon the type of business or industry, the venture is involved with and the financial needs of the venture. Different types of equity and capital options are available depending upon the type of funding required. These financing options include hard money, venture capital, corporate debt, and business loans. Understanding these different financing options is necessary for all types of capital financing and investment projects.