What Is Capital in Business? Definition and Types Explained

In business, the term “capital” refers to financial assets used to fund operations and growth. It can be used to purchase assets, cover expenses, and invest in new opportunities. Businesses have to efficiently manage their capital to meet their obligations as well as innovate and expand into new markets. Although capital is money, from a business perspective, it’s specifically money for current operations and future investments.¹

Read on to learn about the importance of capital in business and it’s different types.

Capital includes money, credit, and other financial resources companies can access. Businesses use capital for expenses such as buying raw materials, meeting payroll, upgrading technology, and supporting daily activities. Capital allows businesses to create and maintain goods and services so they can generate revenue. Effective capital management drives growth and profitability.²

People sometimes use the term “capital” to refer to any asset a company can use to operate and grow, such as “human capital” or “social capital.” However, there are several main types of financial capital, including equity, debt, working, fixed, and trading capital. Each type plays a crucial role in how businesses fund their operations and growth.

Equity capital is the money invested in a business by its owners or shareholders in exchange for ownership stakes.³ It includes funds raised through selling shares of stock, retained earnings, and private investments. Examples of equity capital sources are initial public offerings (IPOs), private equity, and venture capital.

The advantage of equity capital is that it allows businesses to raise funds without going into debt. They have no obligation to repay investors even if the business loses money. The disadvantage is that the owners have to give up a percentage of the business and possibly some decision-making power to shareholders.³

Debt capital includes borrowed funds that have to be repaid, usually with interest. This includes loans, bonds, and lines of credit. Businesses can get debt capital from bank loans, corporate bonds, and private lenders.⁴ Since lenders don't have equity or voting rights, business owners can retain full ownership and control over the business with debt capital. The interest payments may also be tax-deductible.

However, the debt has to be repaid with interest regardless of how the business performs. If the business can’t repay its debt, it may become insolvent. Debt capital provides immediate funds but increases the financial risk.⁴

Working capital is the money a business has available to pay for its day-to-day operations. It’s defined as the difference between a company’s current assets and current liabilities.⁵ Businesses need working capital to stay liquid, which means they can pay short-term debts and operational expenses.

Businesses can’t function without adequate working capital that covers their inventory, salaries, and other immediate costs. Financial leaders manage working capital using strategies such as optimizing inventory levels, extending payment terms with suppliers, and accelerating receivables collection. This prevents cash flow issues and supports ongoing business activities, which contributes to the business’s overall financial health.⁵

Fixed capital is the long-term investments in physical assets that businesses use for production and business operations.⁶ Fixed capital assets last longer than a year and retain their value over time. Businesses use fixed capital for long-term growth, such as infrastructure and machinery. Some common examples of fixed capital assets are buildings, machinery, equipment, and vehicles.

With these assets, businesses can produce goods and services, scale their operations, and maintain a competitive edge. Investing in fixed capital is necessary for businesses to continue to operate, grow, and compete in the marketplace.⁶

Trading capital is the amount of money allocated to buying and selling securities in the financial markets.⁷ Companies and individual traders use trading capital to participate in markets like stocks, bonds, and foreign exchange.

Having sufficient trading capital is essential, as each market has a minimum requirement to ensure participants can cover potential losses.⁷ While some traders use brokers to operate with smaller accounts, the 1% rule suggests limiting any single trade to 1% of the total trading capital to manage risk.⁷ Gradual growth of trading capital helps sustain profits over time.

Financial capital, often simply referred to as capital, can be any resource that has monetary value and can be used to create revenue for the company. Financial capital should not be confused with economic capital, which has a much narrower definition related to risk management.

The different types of capital support business operations in different ways. Working capital supports business operations by providing on-hand funds for regular, immediate expenses. It keeps businesses running and prevents cash flow issues. Equity capital gives businesses a stable financial base and is also often used to finance major expansions or investments without the need for debt payments. Debt capital can provide funds for emergencies or long-term investments.⁸

Another important function of capital is facilitating growth. Capital is often used for new projects, such as entering new markets and scaling operations. Businesses can use equity capital to finance large-scale projects, research and development, and innovations. Fixed capital provides the equipment, buildings, and infrastructure needed to increase the business’s capacity and take on new projects. Debt capital is often the means businesses use to invest in fixed capital.⁸

Having access to a range of capital resources lets businesses manage their risk from market fluctuations, economic downturns, or unexpected expenses. Proactively managing your capital lays a stable foundation for quickly adapting to changing conditions.⁸

With a focus on applying financial concepts to real-world issues, this course provides an overview of both personal and corporate investment with the goal of creating self-sufficient financial managers. Students will develop analytical, measuring, modeling, and forecasting skills through practice problem sets, case study, and formal assessment.

Students should expect a cumulative learning experience as they progress through intensive modules that layer and build upon topics and skills. Students will begin with an exploration of markets and financial institutions from which they will define the role of the financial manager in a corporate setting. Corporate goals will drive analysis throughout the remainder of the course, addressing essential topics like the time value of money, cash flow analysis and forecasting, selective accounting and capital budgeting, differentiating risk, and modeling rates of return.

Businesses can obtain capital from internal or external sources. Internal sources of capital come from within the business, such as retained earnings, which are profits that are reinvested into the business rather than distributed as dividends to shareholders. Businesses can also get internal capital by selling assets they no longer need.⁹

External sources of capital come from outside the business. One common external source is equity financing through selling shares to investors. This can be done through an initial private offering (IPO) or private equity investments. Another external source is debt financing, including taking out bank loans, issuing bonds, or obtaining credit lines. Venture capital and angel investors can be valuable capital sources for startups and early-stage companies. These options provide funds as well as strategic guidance and access to outside resources.⁹

The capital structure of a business reflects how it finances its operations and growth through a mix of equity, debt, and other financial instruments. Financial institutions often analyze a company’s balance sheet to assess its capital structure, including the proportion of liquid capital assets such as cash equivalents. These liquid assets are crucial for maintaining flexibility, as they can be quickly converted into cash to cover short-term obligations or seize investment opportunities.

Companies must strategically manage their liquid capital to balance risk and reward while ensuring they have enough resources to fund their operations and growth initiatives.

Investment strategies play a critical role in determining how businesses allocate their capital for future growth. Venture capital firms are key players in this landscape, providing equity capital to early-stage companies with high growth potential. These firms invest in innovative startups, helping them scale their operations and access new markets.

By aligning their investment strategies with the capital needs of their portfolio companies, venture capital firms can generate significant returns while fostering entrepreneurship and innovation.

Making strategic financial decisions is vital to a business’ success in the global marketplace. With an online MBA from the University of Kansas, you can learn the skills you need to navigate today’s complex business challenges. KU’s program is ranked #9 in Best Online MBA Programs by U.S. News & World Report due to their expert faculty and rigorous curriculum.¹⁰

You’ll enjoy the flexibility of the online program while still receiving personal guidance from KU’s faculty and engaging in interactive projects with peers. Plus, you can tap into the extensive Jayhawk alumni network.

Schedule a call with one a KU admissions outreach advisors today to learn more.