There is having three major types of capital in financial sector all of which are so important for any businesses within the globe. These are different from each other. Now let’s see all of three types in details. 1) Debt capital, 2) Equity Capital, 3) Specialty Capital.
Debt Capital: Debt capital is required when business enterprises facing capital or fund
Debt Capital: Debt capital is required when business enterprises facing capital or fund
crises or deficiencies. Debt Capital generally taken in some agreed conditions that with interest debt amount will be returned back to a wealthy individual or banks or financial organizations or bond holders in a prearranged future date. Where interest expenses may be treated as cost of renting the capital which used in your business for its expansion or growth also it is also known as “cost of capital”. For the new business enterprises that Debt capital may be the simplest way for collecting or funding capital for their business. There profit will be considered as return on capital minus the cost of the capital. For example, profit will be calculated simply from borrowing amount of money minus interest's amount and taxes for a specific period of time under some conditions.
Equity Capital: Some times Equity Capital called as “book value” or “net worth”. We get Equity capital when we deduct assets from liabilities. In some business capital totally funded by Equity capital. As many people don't want to be bankrupt it requires huge time and group efforts or hard work for establishing business as well as for its growth. For example, we know Microsoft has a pure equity capital in its business structure.
Specialty Capital: Specialty capital is the gold standard in some sources of capital has about no economic cost. This may include the followings:
Negative cash conversion cycle i.e. vendor financing, insurance float, Sweat Equity etc.
Negative cash conversion cycle i.e. vendor financing: If you have a super store, you want to raise this business in a separate location for an amount of money as capital
BDT. 50 Lacs. You have to buy inventory, keeping stocks with lot of merchandises. Assume, if you get some clients want to pay you money prior to take your merchandise, this will give you a chance to carry huge merchandise in your store than your capitalization structure. Vendor financing would calculated as part financing at the % of inventories to accounts payable. If we analyze cash conversion cycle, the more days negative this is the better. For example, the Dell Computer has negative cash conversion cycle which helps them to become a larger computer company in terms of no debt.
Insurance Float: Many insurance company, collect money from clients and then invest in fund generating projects or areas to boost their income and in the future they payouts to the policy holder faces accidents like damaged a vehicle, car etc. According to “Buffett”, “Float is money that a company holds but does not own. It has all of the benefits of debt but none of the drawback; the most important consideration is the cost of capital, i.e. how much money it costs the owners of a business to generate float”. As you're using others money in your business to generate more income as a result you have to payout their money with profits in terms of their investment, else you'll keep an amount from that income.
Sweat Equity: This is another form we known as sweat equity. According to, Wikipedia, “Sweat equity is a term that refers to party's contribution to a project in the form of effort as opposed to financial equity, which is a contribution in the form of capital”. Sweat Equity is that, which is created in some assets or in a company as a direct outcome of hard work effort by the owners. For example, the work in which engine has to rebuild in order to enhance its worth may be measured as sweat equity.
