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What Is Business Capital?

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  • Written By: Carol Francois
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 August 2014
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Business capital has two meanings. The first is an accounting term used to describe money invested in the business. The second is a marketing term used to describe the value of the company. This usage is not strictly accurate, but is very common in the business media. The true value of a company is a combination of the balance sheet and goodwill.

The amount of business capital reported on a company's financial statements is based on the total amount of funds in the equity account. When the firm or company is first established, all the funds invested in the start up are allocated to owner or shareholder's equity. As more money is invested, this value increases. At the end of every year, the total net profit or loss is allocated to this account, either increasing or decreasing the value of the firm.

There are three sources of business capital: personal investment by the owners, outside investors, and the sale of shares in the company. All three options have distinct benefits and risks. The primary risk is the loss of money invested in the company, should it stop operations or does not record a profit.

Personal investment in a business can be both time and cash. The time the owner invests in the firm is critical to the success, but it is not allocated to the capital of the business. Only cash investments increase the business capital.

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Outside investors can take the role of angel investors or silent partners. An angel investor provides capital or cash into a business to save it from financial issues. In return, they claim a percentage of all sales and a portion of the ownership. Silent partners provide capital, but do not become involved in the operation of the business. They typically requirement payment in quarterly or annual payments of both the principle and interest.

A company can also increase their capital by selling shares of stock in the company. Each stock purchase increases the cash available to the business while providing a small ownership share. The more shares that are owned by one particular institution or person, the greater influence they have over operations.

Once the funds are received, business capital can be used to purchase new equipment, pay for space, hire staff or met any other operational needs. It is important to note that all investors require a return on their investment in cash payment terms. Review the options available and select the one that works best for your firm.

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amysamp
Post 2

@tolleranza - I am trying to figure out when to go public as well. The best advice I have read thus far is that when you can start to show significant annual increase in revenue and you would like to seek outside investment (as opposed to asking friends, family or trying to secure the ever elusive small business loan) then you are likely ready to be ready to go public.

I also found out that you do not have to go through an initial public offering! I did not know this. I do not know the details of this strategy, just that it is an option.

Also there are companies that specialize in taking companies from private to public; therefore I am thinking about finding out what they think is a must before going public.

tolleranza
Post 1

I did not realize that business capital referred to two different things. I was interested in raising business capital to help a friend raise money to invest in her business.

At what point do companies decide to go public and offer shares of stock in an initial public offering (IPO)?

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