What Is Capital? 4 Types of Business Capital

In business and corporate finance, the definition of capital refers to anything that a business or business owner can use to generate more value. Capital often refers to cash and other assets, such as financial securities, real property, investments, or intellectual capital.

Accountants, economists, and investors use capital to understand the functioning and health of a business, corporation, or economy. Businesses must account for their various means of capital on their financial statements—like balance sheets or profit and loss statements—to generate a complete picture of their net worth.

When a business uses capital or capital assets to generate a profit, it is called “capital gains.” Decreases in total capital associated with capital assets are known as capital losses.

There are many sources of capital for business owners and businesses at large. Here is a breakdown of the types of capital that entrepreneurs or economies can use to generate more profit:

1. 1. Debt capital: Debt capital refers to capital that a business borrows from another source, including loans from financial institutions, other companies, or the government. Debt capital allows businesses to access quick cash, though it is technically a liability because the borrower will need to pay it back to the lender. The cost of capital generation with debt capital can be high because these financial assets are subject to interest rates and loan terms. This type of capital can become a capital loss.
2. 2. Equity capital: Equity capital refers to all of the assets that a business raises by selling equity or shares of the company. These shares can be publicly traded on the stock market if the company has an initial public offering (or IPO), allowing the public to buy shares. Equity capital can also refer to private shares that the business confers to a board of independent investors.
3. 3. Trading capital: Trading capital refers to the financial reserves that a business has assigned to invest and trade securities, like stocks, bonds, and other capital investments. Large financial companies typically rely on trading capital for economic growth and will allot more money to it.
4. 4. Working capital: Working capital refers to the total assets that a company possesses, including the actual economic capital, like liquid cash, cash equivalents, accounts receivable, accounts payable, and bank account balances. Working capital can also refer to profit-generating assets, which the company employs to produce consumer goods, like raw materials, natural resources, machinery, and real estate. You can calculate working capital by measuring a business's current assets against its current liabilities.

Here are some examples of capital in business:

1. 1. Financial capital: Financial capital accounts for the cash and cash equivalents that a business possesses, such as the funds in a business’s bank account as well as accounts receivable, which accounts for money that clients owe the company. Businesses can use these resources to finance day-to-day operations, like paying commercial rent, paying employees, and covering bills.
2. 2. Human capital: Human capital refers to the employees and contractors that businesses use to facilitate services, the process of production, administration, and daily business operations so that the business can function.
3. 3. Intellectual property: Intellectual property, like proprietary programs, partnerships, or patents, qualify as capital because the business can use these assets to generate more profit. Learn more about intellectual property.
4. 4. Physical capital: Any assets that a business uses to facilitate production—from raw materials to machinery—qualify as physical capital. These assets contribute to the company’s profitability by enabling them to produce and facilitate the goods and services that they sell.
5. 5. Real estate: Any buildings, such as offices, warehouses, factories, and retail stores, that the business owns qualify as capital. The business can leverage this real estate when applying for loans from lenders.
6. 6. Securities: Securities, like stocks and bonds, are forms of equity capital. Capital stocks that public or private investors purchase provide the business with finances to invest back into the company.

A business uses capital to facilitate economic growth and keep the operation running. Businesses use capital for many purposes, from financing day-to-day business operations to covering any financial obligations, from debts to investing in new profit-generating opportunities.

A business invests capital to increase their profits to higher amounts than initially invested. Businesses also use capital to show the financial health of their business. A strong capital structure allows businesses to make themselves appealing to investors, which allows them to generate more capital.

Financial capital, or money, is one type of capital. However, the terms “money” and “capital” have different definitions in business. Business capital refers to financial interests and investments actively working for the business by generating profit.

Money, or financial capital, refers to the physical currency that a business can either spend to generate more profit, or deposit into the owners’ personal bank accounts.

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