Types of Capital Structure
The meaning of Capital" structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt. The different types of funds that are raised by a firm include preference shares, equity shares, retained earnings, long-term loans etc. These funds are raised for running the business.
Equity Capital
Equity capital is the money owned by the shareholders or owners. It consists of two different typesa) Retained" earnings: Retained earnings are part of the profit that has been kept separately by the organisation and which will help in strengthening the business.b) Contributed Capital: Contributed capital is the amount of money which the company owners have invested at the time of opening the company or received from shareholders as a price for ownership of the company.
Debt Capital
Debt capital is referred to as the borrowed money that is utilised in business. There are different forms of debt capital.
- Long Term Bonds: These types of bonds are considered the safest of the debts as they have an extended repayment period, and only interest needs to be repaid while the principal needs to be paid at maturity.
- Short Term Commercial Paper: This is a type of short term debt instrument that is used by companies to raise capital for a short period of time.