Financial Capital and Its Subcategories

[Monirul Islam]

Financial capital is a much broader term than economic capital. In a sense, anything can be a form of financial capital as long as it has a money value and is used in the pursuit of future revenue. Most investors encounter financial capital with respect to debt and equity.

Direct investment in a business is referred to as equity. When someone contributes $100,000 to a business in the hopes of receiving a portion of future profits, he increases its equity capital by $100,000. Corporations issue stocks, or shares of company ownership, in exchange for additional equity. Equity capital is not typically accompanied by a guarantee of future returns.

Sometimes a business decides to finance its activities through debt instead of equity. Debt capital does not dilute ownership and does not entitle the creditor to a proportional share of future profits. However, debt represents a legal claim on the assets of the borrowing company and is considered riskier that equity capital. Companies that cannot repay their creditors have to file bankruptcy.

Source: Investopedia