Capital refers to money or funds that are needed by entrepreneurs and business in order to buy what is needed to start a business. The funds may be used to buy products that will assist in providing services or it may go towards salaries. The capital can be used in any manner that will assist in getting the business off the ground.
When you are talking specifically about financial capital you are referring to the funds that are provided to businesses through lenders and investors. This capital is used to purchase real capital equipment. Real capital means the actual physical goods, devices or items that are needed to assist in the production of other goods. For example, this would mean buying sewing machines for seamstresses or tailors, or machinery for factories.
When it comes to the terms of repayment of capital there are three different types: Long term, medium term and short term. The sources of long term capital can come from share capital, mortgages, retained profit, venture capital, debenture and project finance. For medium term loans, they can come from term loans, leasing or hire purchase. And, lastly, short term loans can come from a person’s bank overdraft protection program, trade credit, deferred expenses, or from factoring.
There are also different types of capital. Fixed capital refers to money that will be used to purchase assets that will stay in the business permanently to assist in profit-making. And, working capital is money that can be used to purchase stock or pay expenses or to finance credit.
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