Capital Funding: Definition & Overview

KEY TAKEAWAYS

• Capital funding comes from issuing stocks and bonds
• Entrepreneurs use capital funding to fuel growth
• Venture capitalists often provide capital funding

What is Capital Funding?

Entrepreneurs often seek capital funding from lenders and equity holders. They often use the funds to pay for day-to-day operations as the business gets off the ground. Capital funding is usually a mix of debt in the form of bonds and equity in the form of stock. With stock, lenders receive a certain amount of stock in the company in return for lending money. Their return usually includes interest on the amount loaned to a business. 

How Capital Funding Works

Many business owners start a new company on their own. But eventually, they may need additional cash flow to scale up. They may need capital private funds for things like:

• Business tools
• Land
• New buildings
• Machinery

There are a variety of examples of capital funding.

Issuing Stock

A private company can become publicly traded through an initial public offering (IPO). Investors buy shares in the company as a way of lending money. Equity investors can usually expect an ROI in the form of dividend payments and increased share values. Ideally, the decision makers use shared money to make improvements that elevate the company’s overall value.

There are risks with becoming a publicly traded company. With more shareholders, each person has less influence during a business vote. Privately owned companies usually have fewer stakeholders working together to make business decisions.

Corporate Bonds

If business owners want to keep their company private, corporate bonds are another option. With this method, a company issues bonds to investors with a promise to pay back the bond plus interest. Investors usually receive payments semi-annually until the bond matures. The risk of corporate bonds is that a company may not receive as much funding as they need. 

Corporate Loans for Capital Funding

Companies can also pursue traditional loans as a way of increasing capital funding. A commercial bank often serves as a direct lender. They can issue corporate loans on a long-term repayment plan. This type of loan appears on balance sheets as a liability. Each year the liability decreases as the business pays down the loan. Interest rates on these types of loans may be higher than stocks and bonds.

When Do You Need Capital Funding?

Capital funds provide money when an entrepreneur needs more money to make business progress. The person providing funds considers their capital an investment. They anticipate getting a return of some kind on the funds. Businesses in turn use capital funds to invest in business growth. Examples of ways that businesses use capital funding include: 

• Purchasing or develop land 
• Building a new office or manufacturing location
• Buying new equipment or business tools
• Investing in projects and other revenue-building activities
• Paying for regular business expenses to get off the ground
• Making investments in stocks or bonds in anticipation of a long-term return
• Purchase stocks, bonds, derivatives, or other financial securities
• Paying down debt to save on interest
• Starting a business or venture
• Investing in community efforts
• Funding public relations and marketing

Who Provides Capital Funding?

There are people who make a living by providing capital funding to businesses. Usually called venture capitalists, these people or entities loan out money with the intent of earning back interest. Many focus on a single niche industry. Others choose to focus on either short-term or long-term funding for a variety of companies.

Summary

Companies raise capital funding by issuing stocks and bonds to investors. Small business owners use capital funds for growing their business. Many times venture capitalists provide funding to start-ups in the earliest stages of business.