Question

what are the 4 sources of capital ? explain each one

Answer 1

The sources of capital may be different for different kinds of organizations for example, a small company might not have easy access to debt funding and therefore they will have to rely on venture capitalist for funding their idea, while for a big company there will be many sources of capital which it can use and will be available easily as well. However, to generalize the 4 main sources of capital can be discussed as follows:

• Equity capital: This is the most common source of capital which is invested in the business, it is also known as equity which is invested by the shareholders in the company. This type of capital does not carry a fix charge on it, the cost of such capital will be the dividend paid to the shareholders.
• Debt: This is also one of the most common sources of capital in which the firm will raise external borrowings from the banks and other financial institutions. It comes with a fixed charge, which is the interest payment. Extensive use of debt diminishes the value of company's share and its overall profitability in the longer run.
• Venture capital: It is the capital provided by private equity firms known as venture capitalists. These VC's will invest money in the company in the form of equity, however the management charge of the company remains with the original founder or creator of the company.
• Retained Earnings: The profits earned by the company every year is retained in part by the company for the purpose of meeting its future finance requirements with the money. It is a very convenient source of capital and comes with the least possible cost to the company. Use of retained earnings for the purpose of growth and development of the business enhance the overall value of company in the longer run.