What is Capital Structure?

capital structure

Preparing capital structure is essential for every business growth because every business whether it is small or big, requires a startup capital is needed to lay the foundation. Capital is the fund that fills all our business activities. There are many types of requirements in a business that require a proper capital structure. We can’t do business activities without capital such as:

  • Business startup place like land or building
  • Production
  • Marketing
  • Sales
  • Purchase of goods or services

Every business owner thinks that before building up a new business, they have to arrange an investment capital so they can choose all these according to their business level and growth. Capital structure covers all the finance operations of the business and it is made up of both debt and equity capital.

Capital structure is the arrangement of capital by using two kinds of sources of funds such as equity and debt which is a mixture of requirements in capital structure.

Difference between debt and equity capital

Equity capital is considered as an owner’s fund which is invested by owner’s or investors who invest money in business and get a sharable profit from business. Even shareholders get ownership in the company. Suppose in business, there are 5 owners and all have provided equal share so they contributed profit equally at the end of financial year.

It is also known as share capital in which the number of equity shares multiplied by the face value of each equity share. In other words we can say that investors and other company’s ventures offer a fund to invest in business for the company’s growth.

Every organisation needs working capital to run their business smoothly without facing any financial hindrance. In equity shares, investors has many advantages such as:

Equity capital is considered as an owner’s funds including preference shares + retained earnings + reserve and surplus.

  • Management control: Shareholders can handle management in their own way, they also have full right to focus on management.
  • Profit: Shareholders can take their share of profit according to the contribution.
  • Decision making: Shareholders can take any decision related to business whether it is regarding management, employees, production, marketing etc.

On the other hand, debt capital is totally different from equity capital because in which investors are not other business owners and ventures, they can be banks or other financial institutions, lenders or other financial providers who provide money to the owner’s on interest with proper legal agreement and some financial restrictions.

Debt includes loans + debentures + public deposits + trade credit

Which is riskier ‘Debt or Equity’?

According to me, debt is more riskier than equity because in debt capital, companies borrow money from lenders such as banks or other financial institutions, so these lenders will always have a financial pressure on the company if they don’t give interest on time and repayment of capital. 

On the other hand, in case of equity capital, shareholders can get a share of profit even if they can take out money from business anytime. So Debt is more dangerous than Equity because it consists of financial risk because suppose if the owner of a company is suffering from financial crises so these lenders will have the same financial pressure at that time.