The term “capital” means different things to different people. Simply, capital is money used to start a business. The accountant sees capital as money invested in a business to generate income. The economist on the other hand, sees capital as one of the factors of production (alongside land, labour and entrepreneur) used to create goods or services, with its reward being interest.
To Chief Obi, a businessman who has #1,000,000 to start his spare parts business, money (#1,000,000) is his capital.
To Linda Awe, a blogger, who started her blog with her IPhone 7,her IPhone 7 is her capital.
TYPES OF CAPITAL
The types of capital are not exactly exhaustive. Just as their meanings differ, so also does their types
Natural Capital: Natural capital refers to earth’s natural assets that can be used to produce goods and services. Natural capital is the original basis, not only of production but of life itself. It is from this natural capital that humans derive ecosystem services, which make human life possible. The most obvious ecosystem services include the food we eat, the water we drink and the mineral resources we use to create fuel, building materials and even medicines.
Human Capital: This refers to the collective skills, knowledge, or other intangible assets of individuals that can be used to create economic value for the individuals, their employers, or their community. Getting human capital is mostly by hiring or training hired employees.
Social capital: Social capital refers to the collective value of all social networks (who people know) and the inclinations that arise from these networks to do things for each other (norms of reciprocity) e.g. families, communities, businesses, trade unions etc. For example, referring your neighbor to the delicious new African soup kitchen in your estate.
Financial capital: Financial capital is the sum of all of your assets minus your debts. That is the value of everything you own (cash and assets) minus your total debts equals your total financial capital. Financial capital enables the other types of capital to be owned and traded. It usually comes from two sources: debt and equity.
Debt capital: Debt capital refers to borrowed funds that must be repaid at a later date, usually with interest. Common types of debt capital are:
•Bank loans: This includes overdraft (this occurs when money is withdrawn from a bank account and the available balance goes below zero) agreements and mortgage loans gotten from banks and other financial institutions. Whether or not you get a loan, many times, depends on your financial credibility ( based on your finance history)and type of collateral you can offer.
• Loans from friends and family: Often times, the first cheque to fund a business comes from a family or friend. They are usually easy to close, because they already know you.
• Government agencies: Government agencies such as Bank of Industry (BOI), the Lagos State Employment Trust Fund (LSETF) provide capital for startups and entrepreneurs in form of loans, grants and subventions.
Equity capital refers to funds generated by the sale of stock, either common or preferred shares. This is cash given for a share of a business' profits later. Some sources of equity capital:
• Venture Capital(VC): Venture capital is a form of financing that is provided by firms or funds to small, early-stage, emerging firms deemed to have high growth potential or have demonstrated high growth (in terms of number of employees, annual revenue or both). The typical venture capital investment occurs after an initial "seed funding"(early) round. This type of capital will require you to pitch your business ideas frequently to the investors. This type is very popular among tech SMEs.
• Angel investors
Angel investors (or angel for short) are individual investors who provide financial backing for small startups or entrepreneurs. Angels can be professional investors, successful entrepreneurs, friends, or family members etc.
Other types of capital some of which are listed below exist but they all fall within the above-named types of capital:
1. Fictitious capital e.g. stocks, bonds and securities
2. Fixed capital e.g. land, heavy machinery
3. Working, circulating or variable capital e.g. cash at hand or in bank, money owed to the business by debtors, etc.
4. Floating capital e.g. operating expenses, raw material stock
5. Money or liquid capital e.g. monetary funds, assets that can be easily converted to cash
6. Real capital e.g. sewing machine for a tailor, laptop for a programmer etc.
7. Grant Capital e.g. prize money won from other organizations which do not need to be returned or require equity in exchange
It’s time to think now, what capital does your business need?
