Capital and Financing

Companies need cash to survive. Without cash they would not be able to fund the basic set up of the business, let alone the continued operational costs and the costs of growing the business. Cash is vital to the stability and success of the business.

There are a number of ways that business can generate cash. They are typically classified as either debt or equity.

Debt includes finance raised from external sources where there is an obligation to repay the provider of the finance. Loan capital is the main form of debt obtained by businesses. Loan holders are typically paid an annual finance, or interest, charge.

Equity represents the residual interest in a business, i.e. what is left for the owners when the business is wound up and all the assets are sold and liabilities paid off. Share capital (i.e. the proceeds from selling shares) are a form of equity. Shareholders are typically paid an annual amount referred to as a dividend.

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