Find out now: What is corporate capital? Characteristics & formulas for calculating types of corporate capital including equity, net working capital, investment capital, and loan capital.
What is corporate capital?
Enterprise capital is a financial resource including money or asset value invested, mobilized and used to serve the production and business activities of the enterprise. This is an important factor determining the existence, operation and development of the enterprise.
The role of capital in business includes:
- Provide initial financial resources to establish a business;
- Maintain daily production and business activities;
- Invest in technology, expand markets and upgrade infrastructure;
- Large and stable capital helps businesses increase their credibility with partners, customers and banks;
- Ensure the business is able to weather short-term financial difficulties or financial crises.
>> You may be interested in: How to distinguish between assets and capital of a business.
Types of business capital
When registering to establish a company, businesses are not only interested in the 4 basic types of capital to establish a company such as charter capital, legal capital, deposit capital and foreign contributed capital, but there are many other types of business capital that businesses also need to understand clearly to operate such as equity, net working capital, investment capital, and loan capital.
The characteristics and purposes of each type of capital mentioned above are specifically as follows:
1. Equity
Equity is the net assets of the enterprise, the rest is owned by shareholders, capital contributors (owners).
Equity is formed from 3 sources:
- Owner’s equity;
- Profit from business activities;
- Asset revaluation difference.
The formula for calculating equity is as follows:
| Equity | = | Business assets | – | Liabilities |
2. Net working capital
Net working capital is the difference between a company’s current assets and its current liabilities. Net working capital is used to support the company’s operations and meet its short-term obligations.
The formula for calculating net working capital is as follows:
| Net working capital | = | Current assets | – | Short-term debt |
Then:
- If net working capital < 0: The enterprise does not have enough short-term assets to cover its financial expenses such as payments to suppliers, creditors or difficulty in raising capital;
- If net working capital > 0: The business has enough capacity to pay for current operations and can make investments;
- If net working capital = 0: The business is still able to cover short-term debts. However, this case shows the lack of sustainability of the business.
3. Investment capital
Investment capital is the capital in cash or other assets as prescribed by civil law and international treaties to carry out investment and business activities. Investment capital is formed from two main financial sources: domestic capital and foreign investment capital.
Investment capital is divided into 4 types including:
- Fixed investment capital: Is the capital invested in the company’s fixed assets such as: factories, machinery, equipment, technology…;
- Working capital: Is the capital invested in the company’s current assets such as: inventory, customer debt, cash, etc.;
- Direct investment capital: Is the capital used to pay directly into other projects or businesses such as buying shares of other companies, acquiring businesses…;
- Indirect investment capital: Is the capital that the company invests through funds such as investment funds, trust funds, etc.
The investment capital of an enterprise can be regulated differently depending on each project, including the capital contribution of investors to the project. During the project implementation process, investors can increase their capital contribution to the project at any time without having to increase the charter capital.
>> You may be interested in: Regulations on capital contribution ratio of foreign investors.
4. Loan capital
Borrowed capital is the capital that a business mobilizes from outside through borrowing to serve its production and business activities. This is one of the popular ways to supplement capital in case its own capital (equity) is not enough to meet the demand.
Businesses can take on many different forms of borrowing to form debt capital such as: credit cards, overdraft agreements and debt issuance, bonds, etc.
Frequently asked questions about types of capital in business
1. What is equity?
Equity is the net assets of the enterprise, the rest is owned by shareholders, capital contributors (owners).
>> See details: What is equity?
2. What does equity consist of?
Equity includes:
- Owner’s equity;
- Profit from business activities;
- Asset revaluation difference.
>> See details: Types of equity.
3. What is net working capital?
Net working capital is the difference between a company’s current assets and current liabilities.
>> See details: What is net working capital.
4. What if net working capital is negative?
If net working capital is negative, it means that the business does not have enough short-term assets to cover its financial expenses such as paying suppliers, creditors or having difficulty raising capital. If this situation persists, the business may have to close down.
5. What is investment capital?
Investment capital is capital in cash or other assets as prescribed by civil law and international treaties to carry out business investment activities.
>> See details: What is investment capital.
6. What is foreign direct investment?
Foreign direct investment (FDI) is capital flow from foreign investors investing in enterprises of other countries to carry out production and business projects with that enterprise.
7. What is loan capital?
Borrowed capital is the capital that an enterprise mobilizes from outside through borrowing to serve the production and business activities of the enterprise.
>> See details: What is loan capital.
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