Capital is the blood of a business and finance is necessary to manage the business money. If you want to ask what is the difference between capital and money then the simple answer is “Capital can be in form of money or other assets that help a business to operate and money is the cash which a business spend on a daily bases for its expenses.
What Is Capital In Business?
There are many definitions of capital most popular definitions are the following:
- Capital is the fund in the business
- The fund that helps a business to run its business operations
- The fund is used to generate revenue for a business by using different resources
- All the assets in the business which help a business to make its financial and other decisions
- Nic Barnhart said, “Capital is the gas tank that gives power to the entire business“.
Capital can be increased at any time in a business as it gives the power to a business to run a long life. Capital helps a business to be stable in the market and makes it possible for a business to become a brand.
What are the main sources of capital in the business?
There are two main sources of for a business to rise capital. One is the liability that has to pay later and the second one is share equities that become part of a business because of exchanging the shares in a business.
Types Of Capital In A Business
There are different types of capital used in a business, the most popular capital types are discussed below.
- Equity Capital
- Debt Capital
- Trading Capital
- Working Capital
Share Or Equity Capital
Share capital is the capital which is obtained by the shareholders means capital obtained by issuing shares. Shareholders have voting right in the (AGM) but on the condition, that shareholders held a specific number of shares.
Types of shares
Ordinary shares: these are the shares that are common and the person who has these kinds of shares is a shareholder.
- They have full right to give the vote
- The dividend is paid after preference shareholders
- In the time of liquidation, they are financed after the preference shareholders
Preferences shares: These are the secured shareholders who have a fixed interest in the company whether the company makes a profit or loss.
- They do have not the right to give the vote
- The dividend is paid very first and has fixed interest
- At the time of liquidation, they are financed first but they do have not any right to the company’s surplus.
Terminology of Shares
- Issued Share Capital: Actual shares which are already sold means the capital which issuing shares.
- Paid-Up Shares Capital: After issues of shares amount of money is received from those shares
- Called Up Shares Capital: Pending amount from the issued shares.
- Uncalled Share Capital: The amount for which a company is still not called.
Rights & Bonus Issues and Statutory pre-emption right shares
- Rights issues are offers to existing shareholders for making funds available charge for extra shares and available for existing shareholders not for the public.
- Bonus issues are offered free of cost.
- Statutory pre-emption right shares can offer shares to the public as well (Difference between Rights issues and Statutory pre-emption right shares is only that right issues offers only existing shareholders but Statutory pre-emption right shares can offer shares to the general public.
How to Issue Shares?
Allotment of shares: Shares are allowed by a company under the contract of allotment, Once the holder is entered into the member’s register he becomes a shareholder or a member of a company.
Note: Directors need authority or power to allow or allot shares, Authority may be given by,
- Articles
- Passing the ordinary resolution
Must state how many shares a director can allot and must state the time duration authority to allot shares usually five years.
Note: When a share is issued greater than the nominal value it is said to be premium ex.(If there is the face value of a share is $10 and the nominal value is $8 then $2 is the security premium).
This premium can be used in,
- Writing off expenses occurs during issuing of shares
- Commission paid during issuing of shares
- Issuing bonus shares
Minority Protection
If these 100000 shares in a company and 75% of the shareholders satisfy with the variation, but there are some shareholders who have very few shares in the company then can appeal in court to cancel the variation if they get 15% of the shares.
The variation will only cancel if it is unfair in changes/variation and it affects the rights and power of those shareholders who have very few shares in the company. Variation may cancel within 21 days from the court after passing the resolution.
Loan Or Debt Capital
Borrow money for some purpose and pay interest on that amount and after a specific time return that money to creditors.
Loan Capital is the long-term liability
- Permanent bank overdraft (Credit card)
- The loan from the bank or another party
- Loan on the bases of assets
Debenture
It is a form of a loan that is taken from the general public and pays them interest. It is in form of a document that tells whether the general public can sell the company’s assets in the event that the company will unable to pay its debts.
Three types of Debentures
- Single debenture (Bank loan)
- Issued debenture (Issue a series of registered debentures, Loan by the public)
- Stock debenture (Subscribe by a large number of lenders)
Fixed And Floating Charge
- Fixed Charge: Mortgage on a specific asset such as land.
- Floating Charge: A mortgage on stock may be variable means changeable value in the future.
- Crystallization: When a company can not freely deal with the assets, This situation can occur,
- When a company is in liquidation condition
- Unable to pay loans, debts, fail to care for the stock, etc
- The company is going to finish the work
| Loan Capital | Share Capital |
| They do not have voting right | They have voting right |
| They get interest on the amount | They get dividend |
| Pay first in liquidation | Pay later in liquidation |
| Capital is not necessary to maintain | Capital is necessary to maintain |
Trading Capital
The money which a trader or investors invest in the business is not for purpose of exchanging shares or other financial instruments but can be in form of commodities, bonds, and a country’s currency.
These help an investor to trade and manage the profit and losses in the business as they are apart from the financial industry that supports investment planning.
Working Capital
It shows how a business is able to manage its short-term or current liability. If a company has more current assets than its short-term liability then the working capital is positive which is a good sign for a business but if it is negative then this is an alarming situation for a business.
Positive working capital is necessary for a business to be stable in the market and grow among competitors. Current assets help a business to keep its working capital positive because they can be converted into cash easily or they can be exchanged without any expense.
Capital Maintenance In A Business
Purpose: The main purpose for capital maintenance is that company can not give its fund to its shareholders directly nor indirectly, as a general rule company can not reduce its capital.
Exception: The company can reduce its capital by,
- Reducing its liability
- Reduce excess capital
- Cancel Paid-up capital if it is no longer denoted as an asset
Public Company Procedure to Reduce Capital
| Pass the Special Resolution |
| Confirm the Special Resolution from the court |
| The court may require a company to settle its debts |
| The court will not confirm until debts are fully paid or give a written notice |
| The company must submit a file or a document if its capital fall below 50000 pounds |
Private Public Company Procedure to Reduce Capital
| Pass a special resolution and have a solvency statement |
| A solvency statement by every director that state all debts can be payable within the year |
| Fake solvency statement is an offense and may have punished by imprisonment or fine |
| Copies of the resolution and solvency statement must be sent to the registrar within 15 day |
What Is Finance In A Business?
Finance is the term that defines the management of money, it helps a business to plan finance effectively so a business can get its goal without any barriers.
- Banks
- Capital
- Credit and Debts
These are examples of finance. Finance helps a business in the following:
- Making budget plan
- Making investment strategy
- Rising the capital when needed
- Report about the financial status of a business
- Helps in risk management, etc.
Important Sections Under The Companies Act 2006
| s584 | Cash must be paid by the memorandum subscriber on their subscription |
| s585 | Share payment is not acceptable in form of work or service |
| s586 | The share should not be transferred until the payment is made of at least 25% or 50% |
| s587 | If there is non-cash consideration then it must be received within 5 years |
| s593 | If non-cash consideration is given then a company must appoint an outsider to estimate the value for that consideration and must be done before the 6 months of allotment |
What Are The Treasury Shares In A Business
When a company buys back its own shares from other shareholders and keeps those shares under its power those shares are referred to as treasury shares.
In the past Treasury Shares can only be allowed by public companies but after 30th April 2013 private companies can also keep treasury shares. Companies can buy back their shares from the profit. 10% of the company’s shares can be used as treasury shares.
Companies must cancel these shares by their nominal value. The company can buy whole shares and can use them for resale as well. treasury shares do not have the voting right nor do they get dividends.
If the company gives that share to its employee, It has to inform the registrar within 28 days after disposing of the shares. In the cancelation of shares (Treasury Shares) a company does not need authorization or court permission because those shares are bought back from the company’s profit not from the capital.
What Is Distribution In A Business
If a company wants to distribute, it can be done by the profit in the form of a dividend. Distribution can only occur from the company’s profit. (Distribution profit is the retained earnings).
Distributable profit = Profit for the year – Accumulated loss
Note: Accumulated means sum or total
Public Companies’ rules for dividend
Public companies can declare dividends if their share capital and reserves such as retained earnings are more than their net asset (Net asset = Total asset- all debts).
Reserves that are not distributable
- Share premium/security
- Revaluation reserves or surplus
- Reserves that the company can not distribute
- Capital redemption reserve
Note: Under the “Model Article” directors recommend the dividend, not shareholders. Directors declare dividends by passing an ordinary resolution. It is not necessary if a company made a profit then shareholders are entitled to dividends.
General FAQS
What is capital in business with examples?
Capital is the backbone of a business that can be in form of retained earnings, share or equity capital, and debts.
What is a simple definition of capital?
Resources that are available in a business and help in generating revenue.