Definition of Capital Financing
Put simply, capital financing refers to any capital that is the outcome of a business decision. In other words, a company's current assets and liabilities, but it is more complicated than that. Capital financing is a term used to describe four distinct forms of capital: working capital, debt capital, equity capital and venture capital. These designations refer to the source of the capital financing.
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Working Capital Financing
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Working capital financing is financing that comes from the net profits a company earns; it is the revenue that remains after the company's current debts or obligations are paid. Examples include cash, receivables, inventory and assets. Working capital has important uses in meeting the daily expenses of the company, as well as funding unexpected costs like low profits or equipment repair, recurring costs like insurance and business licenses, inventory for raw materials, cyclical costs such as seasonal increases in sales, or operating costs until payment is received from customers and costs related to process and operational improvements. These functions are largely the domain of working capital financing.
Debt Capital Financing
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Debt capital financing is financing that comes from debt, usually in the form of a loan, line of credit, lease or some other such method. Debt capital can be used to finance working capital needs but it is more commonly used to finance growth, acquisitions, expansion, product development, share repurchasing and other such investments that generate income directly, over an extended period of time.
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Equity Capital Financing
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Equity capital financing is used similarly to debt capital financing, but instead of coming from debt like a loan, the extra capital comes from a company issuing stock or equity. Issuing stock has a benefit of allowing the company to avoid the interest and fees associated with taking on debt, but it carries with it a large potential negative in that issuing equity dilutes the company, its holdings and its ability to make decisions.
Venture Capital Financing
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Venture capital can take the form of debt capital financing or equity capital financing, only instead of the company pursuing this directly, it sells an interest in the company, either via a stake in the company or a promise of future earnings, and generates capital in this way. Aside from working capital financing, venture capital financing has the least cost of any financing types. However, this type of financing is usually only a possibility for companies that are extremely high growth and early in its lifecycle.
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References
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