By Yhordan Serpentini | June 29, 2022
In the previous blog, we analyzed the importance of having access to capital for small businesses, however, if you’re just starting as an entrepreneur, you may not be too familiar with the term “capital” in accordance to business. For this post, we’ll take a much closer look at what capital is in relation to business and marketing, as well as why it is extremely important for your small business’ success.
What Exactly is Capital?
As mentioned before, capital in business refers to the available money a company has to finance itself, which includes day-to-day operations, growth, expansion, profit, loan, etc. The reason capital is so important is because it is what will be circulating profit while also paying your business’ fees; if you don’t have capital or access to capital, your business won’t last long. Capital is also important, outside of feeding your company fuel, because it not only identifies the best mix of capital to fund your small business but also assesses how efficiently and effectively it is achieving it.
Although capital is referred to as the available money, it doesn’t necessarily mean that it IS the money. The difference between capital and money—although related—is that money is an asset meant to be spent on anything, while capital is an asset that is meant to be spent on, or invested in, something that will bring you additional money. For example, if you have $2,000 and decide to spend $400 on yourself, while the rest go into liabilities—either things like rent, gasoline, or any other operational fees like investments, crypto, etc.—the money you spent on liabilities becomes capital while the money you spent on yourself stays as just money.
The Types of Capital
There are numerous types of capital in the industry that we’ll go through, but the four most important ones are Net Working Capital (NWC), equity capital, debt/loan capital, and trading capital.
- Net Working Capital (NWC) is the difference between your business’s current assets and liabilities. In other words, it is the money you will have left over after your operational fees are paid for.
- Equity Capital refers to the assets from selling public or private shares that may have any liabilities or debts potentially attached to them.
- Debt/Loan Capital is slightly more self-explanatory; it refers to the assets or capital that you are borrowing, either from a bank, family, credit, federal or private loans, bonds, investors, etc.
- Trading Capital refers to the assets that are allotted to firms or individuals for the purpose of buying and/or selling large-scale placement of daily trades.
Referenced Sources:
- Hargrave, Marshall. “What Is Capital?” Investopedia, Investopedia, 12 May 2022, https://www.investopedia.com/terms/c/capital.asp#:~:text=Key%20Takeaways,brokerages%20and%20other%20financial%20institutions
- “What Is Capital? Definition, Types, and Examples.” Pareto Labs, 29 Sept. 2021, https://www.paretolabs.com/what-is-capital-definition-types-and-examples/
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