Sources of Capital

Sources of Capital

Business Basics

3B

November 2, 2020

What is Capital?

This refers to money or assets invested in a business.

Sources of capital

• Retained earnings

• Debt capital

• Equity Capital

• Personal savings

• family members

• Friends

• Partnership

Retained Earnings

Companies generally exist to earn a profit by selling a product or service for more than it costs to produce. This is the most basic source of funds for any company and, hopefully, the primary method that brings in money to the firm. The net income left over after expenses and obligations is known as retained earnings or RE

Debt Capital

Like individuals, companies can and borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. These debt issues are known as corporate bonds, which allows a wide number of investors to become lenders (or creditors) to the company.

The main consideration for borrowing money is that the principal and interest must be paid to the lenders

Equity Capital

A company can raise capital by selling off ownership stakes in the form of shares to investors. This is known as equity funding. The benefit of this method is that investors do not require making interest payments like bondholders do, and so this type of capital can be raised even when the first is not earning any money.

Other Sources of Capital

• Personal Savings

• Family Members

• Partnership

Partnership

A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates.

Multiple Choice

The source of finance that is provided by the Owners is called 

• Capital
• Overdraft

Multiple Choice

What is the most likely source of finance for buying a new IT system?

• Mortgage

• Factoring

• A bank loan

Multiple Choice

Profit is important to businesses because:

• it improves businesses, cash balances
• it can be used to measure business size
• it is a measure of businesses, success
• businesses need to pay taxes to the government

Multiple Choice

The owner of Jack’s Furniture Workshop, a one man company, manages to get a massive order to fit out a secondary school in Michigan. He puts $10.000 of his savings into the company so he can buy the needed raw materials, fully expecting to earn it back quickly.

This is an example of:

• Subsidies

• Trade Credit

• Personal Funds

• Share Capital

Multiple Choice

The Board of Ching Shu, a debt collection firm, decides to postpone the payout of shareholder dividends to finance company expansion. The funds are used to open new offices, increasing their circle of activity. The shareholders think this is a great move as they think this will increase their stock value over time.

This is an example of:

• Grants

• Share Capital

• Retained Profits

• Venture Capital