Capital Funding

Capital FundingCapital funding are monetary resources provided to another party for business (or non-business) purposes.

Capital funding is typically invested by a party or parties with the expectation of some form of monetary gain or return at some future time. Capital funding plays an important resource allocation function, as its productive use plays a critical role in promoting economic growth

Who uses Capital?

Capital is provided to and used by a multitude of individuals, organizations, and businesses such as

  • Governments
    • Federal, state, or municipal governments are major recipients of capital
  • Non-Governmental Organizations
  • Corporations such
  • Private Companies
  • Start-up Businesses and Entrepreneurship Ventures
  • Charities, Foundations, and Endowments
  • Individuals

What is Capital Funding used for?

Some common uses of capital funding include

  • Capital can be used for investing purposes. For example, businesses use capital to
    • Buy land
    • Purchase equipment and fixed assets
    • Make expenditures related to their projects or activities
    • Invest resources in international markets
    • Pay their expenses and costs
  • Real estate investment and development
    • Capital can be used to purchase or develop property such as
      • Land
      • Commercial property
      • Office Towers
      • Buildings
  • Investing in financial securities by institutions, investors, and general public
    • Capital is used to
      • Purchase stocks, bonds, derivatives, or other financial securities
  • Lending purposes
    • Capital can be lent to individuals or entities with the expectation of being repaid the principal along with interest
  • Starting a business or venture
    • Capital funding is provided to entrepreneurs seeking to start a new company, and who may lack sufficient funds to do so
    • Can also be used to expand a small business and provide it with necessary resources to take it to the next level
  • Supporting charity work or good causes
    • Various charities and foundations use capital to
      • Help developing countries with urgent and humanitarian needs
      • Support those who are in need dire situations and are in need of resources
      • Create funds to treat or find cures for various diseases, illnesses, and conditions
  • Capital Preservation Purposes
    • Capital can also be preserved and gradually grown by placing it in safe interest-bearing accounts

Types of Capital Funding

Two important types of capital are equity and debt

  • Equity Capital
    • Represents an ownership stake by the capital provider
      • E.g., by providing a certain amount, an investor can own a percentage of a business
    • Common types of equity capital include
      • Common equity
        • Represent the investment in a company’s shares or stocks
        • Traded on secondary markets such as stock exchanges
      • Preferred Equity
        • An ownership stake whereby a periodic fixed percentage of return is demanded by investors
        • Possess features and characteristics of both equity and debt capital
      • Private or Venture Capital Equity
        • Equity Capital whose terms and characteristics are set uniquely and privately by the providers and users of the capital
        • Venture capital represents funds for start-up ventures and businesses,, projects, or activities
    • Usually the riskiest form of capital
      • E.g., investing in the shares of a public corporation entails the risk of losing the entire capital provided
    • Investors require a return on equity capital that is commensurate with the risk of equity capital
  • Debt Capital
    • Represents lending of capital
    • Characteristics and features include
      • a principal amount (lent amount) that must be repaid at a future date
      • Interest is applied to borrowed obligation that must be repaid periodically
      • A time horizon representing the specified time by which the borrower must repay the full obligation
      • Sometimes include the use of collateral and covenants, which are assets or funds provided as backup or reserves to protect against borrower default or non-payment
    • Some Types of Debt Capital
      • Senior Debt
        • Holders of senior debt are guaranteed to be repaid first in line, should a borrowing party default or in the event of bankruptcy
        • Will have strict collateral and covenant requirements
        • Usually command a lower interest rate than junior debt due to perceived safety of capital
      • Junior Debt
        • In the event of default of bankruptcy, holders of junior debt are paid only after senior debt holders’ obligations are satisfied first
        • Considered riskier than senior debt, and thus will usually entail a higher interest rate
      • Junk or high-yield debt
        • Debt capital that is highly speculative in terms of its probability of being repaid
        • For example, recipients of junk or high yield debt (such as companies) could be in highly precarious financial situations (such as facing or emerging from bankruptcy)
        • Considered the riskiest type of debt capital and thus a high interest rate will be applied

 

Conclusion

Capital funding is the provision of monetary resources or capital for productive uses. Capital provided by investors or other parties is used by various entities such as governments, companies, organizations, and individuals in order to fund their functions and operations. In most cases, capital provided is compensated by some form of return to the provider. Two important types of capital are equity and debt. Equity capital represents an ownership stake, while debt capital is a form of lending.

 

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