[ecis2016.org] Capital mainly denotes financial assets like deposit accounts and funds received from dedicated financing sources.
Capital is an indispensable part of businesses. It is responsible for the smooth working of business and contributing to the economy of the nation. Companies employ several capital structures like equity capital, debt capital and working capital for their daily operations. Additionally, the net worth of companies depends on their capital and capital assets. Financing of their working capital is a significant topic of study for any company as the investment in capital is integral for its development and return on investments.
You are reading: Capital and its importance for businesses
Capital: Meaning and definition
Capital mainly denotes financial assets like deposit accounts and funds received from dedicated financing sources. Capital also represents the capital assets of any company that provides financing for day-to-day working, growth, and development.
Capital can be kept as financial assets or sourced from loans as well as equity financing. Businesses primarily have three options for business capital:
- working capital
- equity capital
- debt capital.
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Capital assets refer to long term remaining assets like cash, cash equivalents, and marketable securities, as well as company property like plant and equipment, production facilities, open spaces, offices, and storage facilities.
Importance of capital for businesses
Capital plays an indispensable role in the creation and daily working of a business. Here are some reasons why capital is so essential for any enterprise:
- Capital enables businesses to buy or purchase their goods and machinery. Machinery and infrastructure are essential for businesses to conduct their day-to-day activities and production.
- Capital is also necessary for providing the salaries of employees and relieving them from hard work by indexing better machinery. It also contributes to the economy as a whole.
- Capital can buy the latest technology and specialised tools for production, which will help meet the demand-supply gap. It will also help grow the business by increasing production and improving quality.
How to source capital for businesses?
Businesses source their capital from various sources. Some of the popular sources of capital are mentioned below:
Loans and debts
Entrepreneurs often take bank loans from NBFCs or public banks to source their capital. This allows them to kickstart their business and buy relevant machinery for production. The repayment and interests are made through the profits incurred by the company.
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Capital can also be sourced by offering company shares to the public. Entrepreneurs can invite investors and source their capital from them. However, they will have to offer shares of their company to all investors depending on their amounts.
Sale of assets
Company assets can be sold off to source capital. Any disposable or surplus asset like land, equipment, etc., can be sold to utilise the money as capital for the company.
Crowdfunding is a newly emerging method of securing capital. You can seek the help of NGOs and social websites which offer financial support to budding entrepreneurs. Sometimes you won’t even have to provide any returns on the money or pledge shares.
The owner can also procure capital through their bank accounts and personal assets. An Entrepreneur can save money or sell these personal assets to source capital for their new or existing businesses.
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