In this amazing article, you will get more knowledge on financial vs physical capital, its overview, sources, examples, and types. Basically, getting to know this will help you run both your small and large-scale businesses better for a good result. Before we go further into this topic, let’s look at the definition of financial capital below.
What is Financial Capital?
Financial capital is an asset in terms of monetary value used to start up and maintain a business with the aim to build wealth. Individuals take advantage of financial capital for investment and create more revenue. Basically, financial capital equals debt and equity funds, and measuring it either shows a problem or possible turnover.
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Why Is Financial Capital Important?
Financial capital is very important because that’s how companies invest in their businesses. Businesses or companies make use of financial capital to buy more equipment, buildings, or materials, then turn them into goods in order to provide services to the public.
Managers of companies use financial capital to help the company produce greater future gains, and grow more profits. Meanwhile, the production of a company is made possible through financial capital. This is because financial capital makes provision for income to the product owners.
Mostly, the downside of using debt to raise capital is the interest expense associated with it. The future good performance of every company depends solely on the level of the financial capital available for production. You can agree with me that wealth is built with financial capital. Because when there are more funds, more goods can be produced and sold to increase revenue.
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Financial Vs Physical Capital
Generally, in the world today, businesses are defined by assets alone, which explains more of financial vs physical capital. But the best way to define assets is to break them down into two categories. The two categories of assets when broken down are financial capital and physical capital.
Physical Capital
Physical capital is a tangible asset that can be touched or used for factory equipment. Meanwhile, it can be used for the actual production of goods or services made available by a company. Also, companies used physical capital to fix damaged structures like office buildings, shopping malls, or factories.
Financial Capital
Financial capital always refers to the rightful ownership of assets such as physical capital. This involves the value of any asset which can be twirled for cash in money terms. We can also describe financial capital as money at hand because it can easily be converted to the production of more goods to create or increase revenue.
More importantly, the major difference between physical and financial capital is the placement of price changes. These changes are a result of non-monetary assets and long-term debt during the period. So, when price changes in financial capital, they are included in profits and losses. However, physical capital is placed directly into shareholders’ equity to adjust capital maintenance, unlike financial capital.
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Types Of Financial Capital
Basically, there are three types of financial capital in the world of business today which include the following below:
#1. Debt Capital
This can be defined as a fund grant as a loan to companies or businesses to pay back with interest. Mainly, this type of financial capital comes from banks or well-to-do individuals who lend money to businesses with interest agreements. Examples include peer-peer loans, business loans, credit card loans, microloans, and invoice loans.
Basically, the interest expense of debt capital is the cost of “renting” the capital by businesses to expand in the business world. In this type of capital, the borrower is at an advantage because the profit made with the loan is not shared with the capital owner. Meanwhile, if something goes wrong with the loan or the business fail, the borrower must pay back the loan, that’s the disadvantage.
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#2. Equity Capital
It is the capital a company gets by selling part of its business as shares or bonds to investors in exchange for the cash needed. However, this explained a business’s assets from liabilities. We can also refer to equity capital as book value or net worth.
Meanwhile, the equity capital advantage which makes it favorable to businesses is that there is no debt or repayment of money. But when a profit is made the lender has a share of it, which is the disadvantage of equity capital.
Generally, is quite expensive to run a business funded with equity capital. It may require extra work to expand the business.
#3. Specialty Capital
Specialty capital is the gold standard of capital, just as its name applies. We can also define this type of capital as capital with minimal or no economic cost and without a time limit. Often, specialty capital is a way of buying time to increase revenue. Basically, funds with no direct link to the banking system are considered to be specialty capital.
Average businesses cannot access this type of financial capital because it is mostly the capital for special projects. Examples of specialty capital include funds for special business areas like technology, vendor financing, insurance compensation, and sweat equity.
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Financial Capital Examples
In financial capital, there are mainly three examples, and these include.
- Financial Capital – This includes equity, debt, investments, and working capital.
- Human Capital – Including social, intellectual, physical, and talents/skills.
- Natural Capital – Natural capital is based on commodities, animals, vegetation, and ecologies.
Sources of Financial Capital
Generally, capital is always one challenge people have when starting up a business. Now, the question is, how do you raise the fund needed to expand your business world?. After a good research, it is my interest to list below various sources you can raise financial capital for your business.
Here are 10 ways or sources through which financial capital can be raised by businesses:
#1. Business Loan (secure and unsecured business loans)
Business loans allow individuals or businesses to borrow a specified amount of money to pay back with interest over a period of time. Meanwhile, this form of loan comes in two types, secure business loans, and unsecured business loans.
#2. Invoice Finance
Invoice finance involved companies selling off their unpaid invoices to the factoring company to have the cash in return. Basically, there are two forms of invoice finance which include invoice factoring and discounting.
#3. Business Overdrafts
An ideal source of financial capital for short-term goals is a bank overdraft. This helps businesses to use their current accounts to make payments that exceed their available balance. In other words, the company owes the bank cash if the balance goes to zero levels. Overdrafts play an important role for businesses struggling with regular cash flow.
#4. Business Credit Cards
Business credit cards are the most used finance source for small businesses. Businesses use credit cards to pay for business and their related expenses without involving interest.
Basically, all outstanding balance is usually paid off at the end of the credit-free time, mainly 30 – 56 days. Failure to pay off after the credit-free period attracts interest on the outstanding credit.
#5. Startup Loans
Generally, these are personal kinds of loans acquired through the government to start or grow a business. Startup loans come with the benefit of free 12-month business mentorship to every individual granted the loans.
#6. Merchant Cash Advance
Businesses secure merchant cash advances from lenders via terminal providers by using a card terminal to accept payments from customers. Hence, in regard to this, the terminal provider will see the exact money flowing in and out of the business. That will encourage the lenders in providing funds in exchange for a percentage of the company’s daily credit card income.
#7. Commercial Mortgage
The commercial mortgage helps businesses to grow by investing in property. The amount a business can borrow depends solely on the rental income the property has generated. Meanwhile, the commercial mortgage interest rate is always high because lenders consider it a higher risk than regular home mortgages.
#8. Asset Finance
Asset finance is a form of financial capital that need fund to buy high-value equipment or machinery, also for companies who need to release cash from assets they already own.
#9. Hire Purchase
Hire purchase is the form of financing that a company acquires assets via an asset finance provider. Meanwhile, the finance provider agrees to buy the asset needed by the business, outright.
#10. Finance Lease
Asset finance providers used finance lease to purchase an asset outright based on an agreement with the business owner. They purchase the asset and lease it to the business over a fixed period of time. Basically, a lease is useful for bigger assets such as land or property that can be used over longer periods.
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Financial Capital Of The World
Here are the top 10 financial capital cities across the globe and their world rating:
- New York City – Rating 770
- London – Rating 766
- Shanghai – Rating 748
- Tokyo – Rating 747
- Hong Kong – Rating 743
- Singapore – Rating 742
- Beijing – Rating 741
- San Francisco – Rating 738
- Shenzhen – Rating 732
- Zurich – Rating 724
What Are the Two Types of Financial Capital?
Debt and equity are the two most frequent types of financial capital.
How do you create financial capital?
Firms can obtain the necessary financial capital for such projects in four ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by borrowing through banks or bonds; and (4) by selling stock. When business owners select sources of financial resources, they must also decide how to pay for them.
What Are Differences Between Financial Capital and Real Capital?
Real capital, also known as economic capital, consists of tangible items that aid in the production of other goods and services. Lenders give financial capital in exchange for an interest rate.
What Is Financial Capital Composed Of?
Financial capital, as defined simply, is the earnings created from cash supplied by lenders for the acquisition of real capital equipment and services in order to manufacture things. It only includes profits retained by the company.
What Is Financial Capital Income?
Capital income includes capital funding from public sources, such as devolved formula capital, which is managed by the governing body. money from the sale of assets that aren’t moving.
What Is Social and Financial Capital?
In financial terms, social capital is basically the value of a group’s social relationships and networks, which work together with its economic capital to help the group’s economy grow. Social capital is an important part of a company’s success.
Why Is Financial Capital Referred to as Liquidity?
The ease with which assets can be converted into cash is referred to as financial liquidity. Cash, public stock, inventory, and some receivables are considered more liquid because they can be converted to cash in the short term by a company or individual.
Conclusion
Generally, in the world of business today, financial capital has helped many businesses to grow with its various means of providing funds. All businesses and investment projects need capital to stand or operate perfectly. In simple terms, taking advantage of the financial vs physical capital helps start and grow a business.
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