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Running a business requires more than a great idea—you need resources to turn that idea into reality. Whether you’re launching a startup or scaling an existing business, you need money, equipment, people, and space to keep your business operating day to day.
Capital plays a critical role in your business plan. The right kind (and amount) of funds will help you avoid cash flow crunches, take advantage of new opportunities, and plan for future growth. In this article, you’ll learn about common types of business capital and how to raise funds to support your company’s goals.
What is business capital?
Business capital encompasses all the resources your business uses to operate, generate revenue, and grow. It is not just the cash in your bank account. Capital also includes physical assets—such as the delivery van for your flower shop, the espresso machine in your café, or the software licenses on your computers—or financial assets, such as the money customers owe you. Business capital enables your business to cover its operational expenses, buy inventory, invest in new technology, and expand into new markets.
Your capital structure—the mix of debt and equity used to finance its assets and operations—reveals your financial health to anyone evaluating your business. Lenders examine it to assess your creditworthiness. Investors analyze it to understand your growth potential. Your company’s balance sheet represents your capital structure by detailing your company’s assets, liabilities, and owner’s equity.
Capital structure follows a simple equation:
Assets = Liabilities + Equity
Each element breaks down as follows:
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Assets. All the valuable things your company owns (cash, equipment, inventory).
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Liabilities. The money that your business owes (loans, credit card bills, rent).
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Equity. The value of your company’s assets (what it owns) after subtracting all of its liabilities (what it owes). Essentially, it’s what’s left over for the owners. This is the portion of the company you truly own.
Types of business capital
Business capital comes in different forms, and understanding your options is key to building a healthy capital structure. Having a grasp of the different forms of business capital allows you to match the right type of funding to the right business need. Trying to fund long-term growth with a short-term loan, for example, can be like trying to build a house on a foundation of sand—it creates instability and risk. The most common types of business capital include debt capital, equity capital, working capital, and fixed capital.
Debt capital
Debt capital is money that a business borrows from external sources. Like taking out a car loan or a mortgage, debt capital gives you immediate access to funds while spreading repayment over time. When a business takes on debt, it creates a liability on its balance sheet.
Debt capital is one of the most common ways to raise funds because it lets you keep full ownership of your company. Most businesses use debt capital for specific purchases, such as machinery or raw materials. For example, if you run a retail brand, you might take out a loan for raw materials or use a business line of credit to buy inventory ahead of a busy season.
Common sources of debt capital include:
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Banks or credit unions. These financial institutions offer a variety of loan products. Term loans can give you a lump sum of cash upfront that is paid back in regular loan installments over an established term. A business line of credit offers more flexibility, as you can draw on funds as needed up to a certain limit, paying interest only on the amount you use.
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Small Business Administration (SBA) loans. This organization partners with lenders to provide government-backed small business loans. SBA loans frequently offer favorable terms, such as low interest rates and long repayment periods, but they can have strict criteria—as well as a lengthy application process.
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Online lenders. A growing number of online platforms provide convenient access to debt financing. Businesses that aren’t able to qualify for more traditional bank loans sometimes consider online lenders.
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Issuing bonds. Larger, established businesses can raise debt capital by issuing bonds to investors. A bond is essentially a loan from an investor to the company, which the company repays with interest over time.
If you run your business on the Shopify platform, you may have a more direct path to funding. Shopify Capital is a financing program designed specifically for its merchants. Instead of a traditional loan application, Shopify offers funding to eligible businesses based on their sales history. Repayment adapts to your revenue: A percentage of your daily sales is automatically deducted until the funding is paid back. On slow days you pay less, on busy days you pay more—protecting your cash flow during seasonal fluctuations or unexpected downturns.
Equity capital
Equity capital refers to funds raised by selling assets in the form of company ownership to investors. In exchange for their investment, investors receive part of the company’s business equity and, consequently, a claim on its future profits. Unlike debt financing, you don’t have repayment obligations. Investors only receive their money back if they sell their stake or receive dividends as your company grows.
Selling a stake in your business can be a way to raise a significant amount of money without taking on debt. However, there are trade-offs: Taking investors can mean diluting your ownership and control of the company. Common sources of equity capital include:
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Angel investors.Angel investors are individuals who provide capital for early-stage businesses. They often bring valuable industry experience and mentorship in addition to their financial investment.
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Venture capital firms. Professional VC firms invest in high-potential companies in exchange for an equity stake. Venture capitalists typically invest larger sums than angel investors and take a seat on your board of directors, playing an active role in its strategic direction.
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Private equity firms. PE firms generally invest in more mature, established companies. They might acquire a company outright or take a significant stake with the goal of improving its operations and financial performance before selling it for a profit.
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Crowdfunding. Crowdfunding platforms let you raise capital from a large number of people online. Equity crowdfunding involves selling small stakes in your business to individual investors.
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Self-funding. Also known as bootstrapping, this strategy involves founders building your company using personal finances and revenue from the business itself, without external investors. This approach typically draws from the owner’s equity, created when you invest your own savings. It may also involve personal debt, such as using credit cards to manage cash flow.
Working capital
Working capital is the capital available to a business for its day-to-day operational needs. It’s calculated by subtracting a company’s current liabilities from its current assets:
Working capital = Current assets – Current liabilities
Current assets include cash, inventory, and accounts receivable, while current liabilities include accounts payable and short-term debts. For example, if you have $20,000 in cash and inventory (current assets) and $5,000 in upcoming bills and supplier payments (current liabilities), you have $15,000 in working capital. This positive number tells you that you have cash to cover your short-term obligations.
This capital is used to:
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Purchase raw materials and buy inventory
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Pay salaries and other immediate operational expenses
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Manage fluctuations in revenue and expenses
To efficiently manage your working capital, you need a clear understanding of your cash flow and operational cycle.
Fixed capital
Fixed capital is the long-term physical assets a company buys to produce its goods or services. While these are tangible resources, you can’t easily turn them into cash. Think of fixed capital as the foundation and walls of your business’s house: You don’t buy them with the plan to sell them the next week. You buy them to use for many years.
Fixed capital assets are not sold to customers, but they do help generate revenue. They include physical assets like:
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Delivery trucks
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Office buildings or studio space
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Phones, computers, and servers
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Manufacturing machinery
Business capital FAQ
What is Shopify Capital?
Shopify Capital is a financing program offered exclusively to Shopify merchants. It provides funding through merchant cash advances and loans, which are repaid as a percentage of daily sales. The program offers a streamlined alternative to traditional lending for ecommerce businesses looking to invest in inventory, marketing, and other growth initiatives, with funding decisions based on their sales history on the platform.
How do I get capital for my business?
There are many avenues to secure capital for your business, which include self-funding or investing personal liquid assets. New businesses often apply for small business loans from banks, credit unions, or online lenders. Seeking corporate investment from angel investors or venture capital firms is another option, as is crowdfunding. Government funding or grants is another route.
Why is capital important?
Without adequate business capital, it’s very difficult for a business to survive, let alone thrive. That’s why it’s so important for business owners to have a solid understanding of their capital needs and to have a plan in place for securing the funding they need. Capital is what allows you to cover day-to-day operational expenses, invest in the physical assets and technology needed for current operations, expand into new markets and reach new customers, and hire talented employees to build your human capital.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
