Capital funding is the money a lender and equity holder offer you to a business for everyday and long-term needs. A startup fund for a company’s capital funding may consist of two components:
- debt (bonds)
- equity (stock)
The business uses money for operating capital. The bond and equity holders earned a return on their investment in different forms:
- interest
- dividends
- stock appreciation
What is capital funding?
To obtain capital or fixed assets, businesses raise funds through the programs of capital funding to purchase different assets, such as:
- land
- buildings
- machinery
The two primary routes of a business that take you access to funding are:
- raising capital through a stock issuance
- raising capital through debt
What is stock issuance?
A company can issue standard stock through IPO (Initial Public Offering) or by issuing additional shares in the capital markets. The money provided by the investors purchasing the shares will be used for funding capital initiatives. In return for providing capital, the investors demand a return on the ROI, a cost of equity to the business. The Return On Investment can be provided to stock investors through paying dividends or by managing the resources of the company to increase the value of the shares held by these investors.
What is debt issuance?
Capital funding is acquired through issuing corporate bonds to institutional and retail investors. When businesses issue bonds, they are borrowing from investors who are compensated with semi-yearly coupon payments until the bond matures. The coupon rate on the bond will represent the cost of debt to the issuing company.
Additionally, bond investors can purchase a bond at a discount and the face value of the bond is repaid when it matures. For instance, the investors purchasing a bond for $910 receive a payment of $1,000 when the bond matures.
The cost of capital funding
Companies run an extreme analysis of the cost of receiving capital by the following:
- equity
- bonds
- bank loans
- venture capitalist
- sale of assets
- retained earnings
The business assesses its WACC (Weighted Average Cost of Capital), weighing each capital funding cost to calculate the average cost of capital of the company. The WACC is compared to the ROIC (Return On Invested Capital). The return that a company creates when converting its capital into capital costs. If the ROIC is higher than WACC, the company moves forward with the capital funding plan.
If it is lower the business has to re-evaluate the strategy and rebalance the proportion of needed funds from different capital sources to reduce its WACC.
Some companies exist for the sole purpose of delivering capital funding to businesses. A company may specialize in funding a specific category of companies, such as:
- healthcare companies
- specific type of company
The capital funding company operates to deliver only short-term financing and long-term financing to a business. These companies, venture capitalists, could choose to focus on funding certain business stages, such as a business that is just a startup.
Capital funding gives businesses equity holders and lenders cover the cost of operations.