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 Does "Capital Intensive" M...26 Views
Finance a la shmoop what does capital-intensive mean? lots and lots and
lots and lots of capital yeah that's what it means starting a website, two [Two young kids setting up a website in a garage]
kids a garage and a nice home computer not capital intensive, drilling for oil
in the North Sea highly capital intensive...
well capital needed for the two kids in a garage building a search engine about
two million bucks capital needed for the oil rig well like ten billion bucks and
why does the capital intensity matter well if you can create Google that
generates a few billion dollars of free cash flow a quarter for a total capital
input of maybe a hundred million dollars ie a few rounds after the garage round [Equity investment agreement documents appear]
then investors in it make an absolute killing like if you don't dilute
yourselves and the stock goes up a lot life's good yeah hundreds or thousands
of times their original investment if you create BP British Petroleum or Royal
Dutch Shell or Chevron which also have a few billion dollars of free cash flow a [Cash flowing into fuel tanks]
quarter but it takes you ten billion dollars in capital to generate those
returns then yes you get a nice investment return but it's nothing that
you know Vikings sing songs about and it's the allure of the capital [Man typing on laptop]
unintensive businesses like building a website in Yahoo or a search engine in Google or a video streaming
site in Netflix that takes relatively small amounts of capital to start and
then produces mounds of free cash profits that has made venture
capitalists fall all over themselves hoping to find that one little garage [Person looking through binoculars at garages]
with the next great white whale yeah that's intensive...
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