Definition Of Financial Capital
Financial capital is the sum of money required by any organization or business to purchase various assets to promote their services in the market. It includes the acquisitions of plants, equipment, and other items needed to build products or offer services. The assets required by a company to provide goods or services are measured in terms of monetary value. Therefore, capital can be known as the money raised from debt and equity in an organization. Capital in an organization possesses a great significance as it estimates the sum of money needed to cover possible losses from unexpected risk. Therefore, it is imperative for a company to maintain a robust financial capital to sustain in the time of economic crisis. Thus, we can conclude that Financial capital can also be known as Investment capital.
Financial capital is often used by individual entrepreneurs to buy required assets to promote their goods and services in the market. In this way, they can successfully provide their services to different sectors of the economy upon which their operation is based. Few examples of this are a retail business, corporate, investment banking, etc. It is imperative for the entrepreneurs today, to effectively utilize their financial capital to assemble their product or services. The sectors of the economy in which their products are formulated are like retail and corporate. The various forms of funding like money or credit contribute to the growing wealth of business are categorized under financial capital. Therefore, capital can be categorized into multiple types of assets like cash, factories, machinery, and types of equipment that are used by a business in production.
How Financial Capital Works?
To achieve a better understanding of the working concept of a Financial Capital, you need to study the following two examples to realize its working.
- Speculate a company named ABC, and this company is in an urgent requirement of $ 2000 to ensure its sustainability in the market. What according to you should the company do to attract that amount of money? The company went to offer on the bond market for 10-year bond a par value of $ 2000. So, when the bond is purchased by someone who wants to earn interest on $ 2000, ABC company receives the amount of $ 2000. In return to this, the investor gets the bond with a promise of repayment with interest. Moreover, if the investor is no longer interested in bonds, he can freely sell it to another interested investor.
- Consider the same company ABC going to the bond market to buy ten new shares of stock for $ 200 per share. After purchasing the shares, ABC company makes these available in the market for sale. Now think if someone buys ten of the shares, then ABC company will receive an amount of $ 2000 from the investor. Therefore, this way a company ensures its sustainability in the market.
Types Of Financial Capital
To get a better understanding of Financial capital, you need to attain a knowledge of types of Financial capital. There are primarily three types of Financial capital explained as follows:
- Equity capital: This type of Financial capital is most popular among entrepreneurs as they don't need to pay it back due to its expensive nature. Equity capital is also known as "Net Worth" or "Book Value." While calculating the equity capital for a business, the company's assets are subtracted from its liabilities. So, numerous enterprises are depending entirely on equity capital holding cash investment of shareholders or owners.
- Debt capital: A debt is defined as the process of investment of capital in the form of a loan by an individual or business to another business. The loan is credited with an agreement to pay back the amount borrowed within a stipulated time. In the process of debt capital, the owner of the business agrees to accept interest payments in exchange for lending the money. You can think of interest expense as the cost of "renting" the capital to expand your business. Due to this reason, it is also known as the cost of capital.
- Specialty capital: As the name suggests, specialty capital can be most beneficial among others as it has a gold standard. It is the type of practice famous among all kinds of business owners. Specialty capital has managed to gain its popularity because of its various sources that can take you beyond the limits of growth. These include factors such as a negative cash conversion cycle (vendor financing), insurance float, etc.
Textbooks On Financial Capital
Technological Revolutions and Financial Capital
Published by Edward Elgar Publishing in 2003
By C. Perez (Author)
Capitals of Capital: The Rise and Fall of International Financial Centres 1780-2009
Published by Cambridge University Press in 2010
By Youssef Cassis (Author)
Financial Reporting Information And Capital Markets
Published by Pearson Education Limited in 1991
By Michael Bromwich (Author)
The Power of Management Capital
Published by McGraw-Hill in 2003
By Armand Feigenbaum, Donald Feigenbaum (Authors)
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