Borrowed Capital
“Neither a borrower nor a lender be,” Shakespeare tells us in Hamlet. But if you are starting a new business or buying a house, chances are you will need to borrow some capital. To be in debt or not to be in debt, that is the question.
Borrowed capital is when you go hat in hand to a bank or other lender, fill out all kinds of paperwork, and hopefully obtain a loan based on your income or other assets. The value of your home serves as collateral (what they will take if you don’t pay back the loan) and for businesses, the collateral might be the value of your accounts receivable or finished inventory.
Borrowed capital is different from “equity capital,” where you are making a down payment on a house from your own savings or selling all your jewelry in order to start your new business. Another way companies borrow capital is to issue bonds that have to be paid back with interest.
Related or Semi-related Video
Finance: What is working capital?268 Views
finance a la shmoop. what is working capital? alright people say we're opening
a lemonade stand. I seed what you did there. unfortunately we can't just blink [man stands in front of stage]
our eyes like Aladdin's genie and you know make it all happen. magically we
don't need a ton of money to start things but we need some money in advance. [genie comes out of lamp]
of you know when we begin collecting revenues well we have to rent a location,
and pay six months rent in advance, and we got to buy about 87 pounds of
sugar and 4,000 lemons and hundred fourteen huge bottles of purified water,
oh and cups we need eight thousand cups. all told it costs about 50 grand in
capital, working capital. see we did there, we need before we can start to run the
business, and you know pay employees and so on .so we get an investor TBOG. the [people stand in line for lemonade]
bank of Grandma. yeah we love her. she gives us a hundred grand. well that
entire hundred grand invested into our little business is our total working
capital. right? fifty grand and start the business working and we got 50 left over
or just in case things don't start up as quick as we hope .its capital that lets
us start working. in cleverly named there. all right well 50 grand we know we're
gonna spend 50 grand and cover the time in between when we're up and running and [calendar]
revenues and all the other stuff start to kick in. and well yeah it's that
simple. put together an actual drinkable lemonade recipe ?well that's just a
little bit harder. working capital. live it love it breathe it. [ grandma grimaces]
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