how capital is used
capital is used by companies to pay for the ongoing production of goods and services to create profit companies use their capital to invest in all kinds of things to create value labor and building expansions are two common areas of capital allocation by investing capital a business or individual seeks to earn a higher return than the capital s costs at the national and global levels financial capital is analyzed by economists to understand how it is influencing economic growth economists monitor several metrics of capital including personal income and personal consumption from the department of commerce s personal income and outlays reports capital investment also can be found in the quarterly gross domestic product gdp report typically business capital and financial capital are judged from the perspective of a company s capital structure in the u s banks are required to hold a minimum amount of capital as a risk mitigation requirement sometimes called economic capital as directed by the central banks and banking regulations 1other private companies are responsible for assessing their capital thresholds capital assets and capital needs for corporate investment most of the financial capital analysis for businesses is done by closely analyzing the balance sheet business capital structurea company s balance sheet provides for metric analysis of a capital structure which is split among assets liabilities and equity the mix defines the structure debt financing represents a cash capital asset that must be repaid over time through scheduled liabilities equity financing meaning the sale of stock shares provides cash capital that is also reported in the equity portion of the balance sheet debt capital typically comes with lower rates of return and strict provisions for repayment some of the key metrics for analyzing business capital are weighted average cost of capital debt to equity debt to capital and return on equity types of capitalbelow are the top four types of capital that businesses focus on a business can acquire capital by borrowing this is debt capital and it can be obtained through private or government sources for established companies this most often means borrowing from banks and other financial institutions or issuing bonds for small businesses starting on a shoestring sources of capital may include friends and family online lenders credit card companies and federal loan programs like individuals businesses must have an active credit history to obtain debt capital debt capital requires regular repayment with interest the interest rates vary depending on the type of capital obtained and the borrower s credit history individuals quite rightly see debt as a burden but businesses see it as an opportunity at least if the debt doesn t get out of hand it is the only way that most businesses can obtain a large enough lump sum to pay for a major investment in the future but both businesses and their potential investors need to keep an eye on the debt to capital ratio to avoid getting in too deep issuing bonds is a favorite way for corporations to raise debt capital especially when prevailing interest rates are low making it cheaper to borrow in 2020 for example corporate bond issuance by u s companies soared 70 year over year according to moody s analytics 2 average corporate bond yields had then hit a multi year low of about 2 3 3equity capital can come in several forms typically distinctions are made between private equity public equity and real estate equity private and public equity will usually be structured in the form of shares of stock in the company the only distinction here is that public equity is raised by listing the company s shares on a stock exchange while private equity is raised among a closed group of investors 