Capital: Definition, Uses, Structure, and Types in Business

Key takeaways
* Capital is the money or assets used to run a business and fund future growth.
* Main business capital types: working capital, debt capital, equity capital, and trading capital.
* Capital appears on the balance sheet as cash and other assets; debt capital is matched by a liability.
* Capital structure—the mix of debt and equity—affects risk, return, and cost of capital.

What is capital?

Capital broadly denotes resources that confer value and are used to generate returns. That can mean:
* Cash and cash equivalents used for daily operations and investments.
* Physical assets (factories, equipment), real estate, inventory, and intellectual property.
* Financial assets such as marketable securities.

In practice, “capital” usually refers to liquid funds set aside for productive use, but the term can also include illiquid capital assets that contribute to a firm’s productive capacity.

Understanding capital

From an economic perspective, capital is a core input for production and growth—at the level of individuals, firms, and entire economies. On a company’s balance sheet, capital-related items appear among current assets (cash, receivables, short-term securities) and long-term assets (property, plant, equipment, intangible assets).

How capital is used

Businesses deploy capital to:
* Fund day-to-day operations (pay suppliers, payroll, rent).
* Invest in growth (new facilities, R&D, acquisitions).
* Cover short-term liquidity needs and absorb shocks.

Economists monitor capital flows and investment to assess economic activity (e.g., personal income, capital formation in GDP). Regulators also require banks and other financial institutions to hold minimum capital buffers to mitigate risk.

Business capital structure

A company’s capital structure is the mix of debt and equity used to finance its assets. Key points:
* Debt financing provides cash but creates repayment obligations and interest costs; it appears as a liability on the balance sheet.
* Equity financing provides cash in exchange for ownership claims; it appears in shareholders’ equity.
* Important metrics for assessing capital structure include weighted average cost of capital (WACC), debt-to-equity ratio, debt-to-capital ratio, and return on equity (ROE).

Types of capital

Debt capital
* Borrowed funds from banks, bond markets, governments, or private lenders.
* Requires regular repayments and interest; interest costs are the explicit cost of debt.
* Often used for large, one-time investments or to leverage growth. Monitor debt-to-capital ratios to manage solvency risk.

Equity capital
* Funds raised by issuing shares (private placements or public equity/IPO).
* Carries ownership dilution and expectations of returns via dividends or capital gains.
* No mandatory repayments, but equity is typically a more expensive source of capital than debt.

Working capital
* Measures short-term liquidity: Working capital = Current assets − Current liabilities.
* A common operational formula: Accounts receivable + Inventory − Accounts payable.
* Indicates a company’s ability to meet obligations due within one year; negative working capital can signal liquidity stress.

Trading capital
* Cash allocated for buying and selling securities, used by brokerages and trading desks.
* Traders manage trading capital via position sizing and cash reserve rules to optimize returns and control risk.

Capital vs. money

Money is a medium of exchange and a store of value. Capital is money (or other assets) specifically deployed to produce additional value or returns. Capital typically has an associated cost:
* Debt capital: cost = interest.
* Equity capital: cost = required return to shareholders (dividends, growth expectations).

Common questions

What does capital mean in economics?
* Often refers to liquid assets available for spending on consumption or investment; more broadly it includes productive assets used to generate income.

What is capital in a business?
* The funds and assets available to operate and grow the business—ranging from cash and receivables to equipment, property, and intellectual property.

Examples of capital
* Cash reserves, proceeds from a bond issue or stock sale, manufacturing equipment, commercial real estate, and patents.

What are the main sources of capital?
* Working capital (operational cash flow), equity capital (share issuance), and debt capital (loans, bonds).

Bottom line

Capital is any asset—most commonly cash or liquid funds—used to run operations and invest for future returns. Understanding the types of capital and a company’s capital structure is essential for assessing liquidity, risk, and growth potential. Effective capital management balances cost, availability, and strategic objectives to support sustainable business performance.