Business capital: How it works, and where to get it
Find out the key sources of business capital — and how to get it for your business. Presented by Chase for Business.
- Business capital includes the physical, financial and intangible resources that a company needs to sustainably operate and promote growth.
- Business financing is the process of acquiring funds, usually through debt or equity, while business capital is the result of that financing.
- Business capital can be generated internally from the company’s own resources, such as retained earnings and selling assets, or externally from outside sources, such as debt financing and equity financing.
Bootstrapping — in other words, relying on your own savings to get your business off the ground — might seem like the easiest way to fund your startup, and for many small business owners, it’s a great place to begin. But as your business grows, it’s important to understand the different types of capital at your disposal and how each can support your business in its next stage of growth. This guide will help you understand the different kinds of business capital and how to generate each for your business.
What is business capital?
The term “business capital” covers all the assets you need to operate and grow your business. It is both tangible and intangible, covering operating expenses like rent, material costs and salaries, as well as intellectual property and even machinery.
Business capital vs. business financing
Business capital and business financing might sound similar, but they’re totally different concepts. Business capital refers to the resources — financial or otherwise — that make it possible to run your business. Business financing, on the other hand, is the process of obtaining funds from outside sources to create or grow that capital. In other words, financing is a way to acquire a specific type of business capital, but capital itself is more than just money.
Types of business capital
Business capital covers a wide scope of assets, including cash, equipment and intellectual property. Essentially, capital is any resource that helps drive your business forward. Let’s break down the two main types of capital — financial and non-financial — and what falls under each.
Financial capital
- Debt capital: This is money you borrow through an external loan from a bank or lender. This can include small business loans, business lines of credit or other financing options. Debt capital is repaid with interest by a specified date, and managing it responsibly can help build your business credit.
- Equity capital: These are funds you raise by selling shares or ownership stakes in your business. It isn’t repaid, but it entitles investors to a portion of your company’s returns and assets.
- Working capital: This is the cash you have available for daily operations to run smoothly. To calculate working capital, find the difference between your company’s current assets and its current liabilities.
Non-financial capital
- Physical capital: These are the physical tools and human-made assets that keep your business running, including equipment, vehicles, buildings and infrastructure.
- Human capital: This is the collective value your employees bring through skills, knowledge, experience and abilities.
- Intellectual capital: These are the intangible assets like your brand, trademarks and industry knowledge that give your business a competitive edge.
- Social capital: This is the value of your networks and relationships, including connections with customers, suppliers and your community, that help support your business’s growth and strengthen its reputation.
Additional sources of business capital
Once you understand what business capital is, you’ll want to know more about the key ways to secure it. You can generate capital internally through business performance and efficiency or externally through non-traditional funding channels.
Internal sources of business capital
- Profits and retained earnings: Reinvesting a portion of your company’s income in the business is a self-funded way to support expansion or new projects.
- Operational efficiencies: Cutting costs, reducing waste and streamlining processes can free up your cash to reinvest in your business.
- Employee development: Training and upskilling your team can boost productivity, spark innovation and improve the quality of your products or services.
- Innovation and R&D: Dedicating funding to creating new intellectual property such as patents, unique formulas or software can help you establish assets to generate future revenue.
External sources of business capital
- Partnerships and alliances: Establishing a mutually beneficial relationship with another company can help you share resources, costs and expertise.
- Grants and awards: Applying for financial awards and grants from government agencies, foundations or corporations could help you gain the equity to grow without taking on debt.
- Community and network support: Building strong connections with your local community, customers and professional networks can create opportunities for funding and business referrals.
FAQs
Want to learn more about business capital? We’ve answered some commonly asked questions.
What type of business capital is best for startups?
For a newer small business owner, it can be a good idea to start with equity or grants for funding growth to avoid taking out loans and overloading debt too soon. From there you can consider slowly introducing debt to pay for business operations.
When should I bootstrap vs. seek external funding?
Many small business owners start by bootstrapping (using their own savings to fund their business) to establish their brand and prove their selling point. External funding is the next step toward scaling your business when you’re ready.
Can I combine multiple business capital sources?
Yes. It can be smart to combine different sources of capital to balance risk and control. Using a mix of debt, equity and internal funds can help you reduce financial pressures and fuel short-term needs and long-term growth at the same time.
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