What is capital?

To begin with, we should understand the definition of the capital. Capital is the business's origin of assets. Specifically, capital sources are financial relationships through which an enterprise can exploit or raise a certain amount of money to invest in assets for profitable business activities.

Capital can exist in forms such as money, property funds, ownership of assets with monetary value, etc. Besides reflecting the origin of the enterprise's assets, capital represents the business's economic and legal responsibilities for that assets.

Categories of capital sources

Based on the origin of assets, there are 2 types of capital sources: equity and liabilities.

Owner's equity is the initial capital the business owner spends to serve production and business activities or profits earned from production and business activities. Owner's equity is a long-term capital source and has no commitment to pay. A business can raise equity from:

+ Initial contributed capital

+ Undivided profits

+ Issuance of shares

A liability is a present obligation of the enterprise arising from past transactions and events for which the enterprise is liable to settle with its resources. Liabilities are characterized by the capital used over time with many constraints such as mortgages, interest payments, etc. Enterprises can raise debt capital from:

+ Bank credit

+ Trade credit

+ Issuance of bonds

Details of different ways for enterprises to raise capital are presented below.

Different ways to raise capital for businesses

1. Initial contributed capital

Initial contributed capital is the capital formed by the owners' contribution when establishing the business. The form of ownership will determine the nature and form of capital creation of the enterprise itself. With the initial contributed capital, the enterprise is completely proactive in using capital, not being dependent on outsiders. However, the initial contributed capital is usually not high, only accounting for about 20% - 30% of the enterprise's total capital.

In State companies, the initial contributed capital is the investment capital of the State.

In private companies, the initial contributed capital is the investment capital of the private company’s owner registered by the owner himself. In limited liability companies and partnership companies, the initial contributed capital is the total value of capital contributed by the members committed to contributing to the company.

In joint-stock companies, the initial contributed capital is the total par value of all shares registered to buy and recorded in the company's charter. For a joint stock company, the capital contributed by the shareholders is a decisive factor to form the company. Each shareholder is an owner of the company and is only liable for the amount of shares they hold.

A popular term is “legal capital”. Legal capital is the minimum capital required by law to establish an enterprise. The business owner must have the necessary legal capital to apply for business registration. In reality, the owner's capital is often much larger than the legal capital, especially after a period of operation and business expansion.

2. Raising capital from undivided profits

Undivided profit is a part of the business's profit, used for reinvestment, or in other words, the amount of profit not used to distribute dividends to shareholders. For SMEs, reinvestment depends not only on the enterprise’s profitability but also on the State's reinvestment policy. For joint stock companies, retaining profits means they will receive no dividends but in return, they have ownership of the increased share capital of the company.

The form of financing from undivided profits has a significant impact on business capital, creating opportunities for the company to earn higher profits in the following years. At the same time, businesses can be independent in financial matters, and easier in credit relations with banks, credit institutions and shareholders.

However, capital from retained earnings can cause conflicts of interest between managers and shareholders, reducing the attractiveness of the stock at the early stage. The retention of profits can cause the share price in the market to decrease, adversely affecting the business.

3. Raising capital from issuing shares

According to Clause 2, Article 4 of the Law on Securities 2019 of Vietnam, shares are defined as a type of security certifying the lawful rights and interests of the owner to a part of the share capital of the issuing organization.

Conditions for offering shares to the public include:

+ The enterprise has a contributed charter capital at the time of registration of the offering from ten billion Vietnam **** or more calculated according to the value recorded in the accounting books;

+ Business operations of the year preceding the year of registration of the offering must be profitable, and at the same time, there must be no accumulated loss by the year of registration of the offering;

+ Having an issuance plan and a plan to use capital obtained from the offering approved by the General Meeting of Shareholders

+ A public company registering to offer securities to the public must commit to put the securities into trading on the organized market within one year from the date of completion of the offering approved by the General Meeting of Shareholders.

Issuing shares is a tool to help businesses get a large amount of capital to expand and develop the business. This method helps businesses increase the amount of reciprocal capital to implement large-scale projects and improve the business's ability to borrow capital.

Using this method, the enterprise does not have to return the principal and is not required to pay dividends if the business does not make a profit because its dividends are divided from after-tax profits.

4. Raising capital by bank credit

Bank credit is an asset transaction between a bank and a borrower who is an organization or individual in the economy, in which the bank transfers assets to the borrower for use within a certain period as agreed upon agreement, and the borrower is responsible for unconditionally repaying both principal and interest to the bank when due. Bank credit has many forms such as instalment credit agreements, loans under credit limits, revolving credit agreements, long-term investment loans, etc.

According to the Vietnam Banks Association (VNBA), 40% of the total needs of businesses are financed by bank credit, and 80% of the capital supply for SMEs is from the banking channel. Businesses use bank loans to invest in fixed assets, supplement working capital and for their projects.

Using bank loans, businesses can mobilize a large amount of capital in the short term or long term, thus meeting capital needs for different purposes. In addition, interest on bank loans is considered an expense of enterprises, so when using bank loans, enterprises can reduce a part of corporate income tax. In addition, compared to other sources of capital, the cost of using bank credit is considered the cheapest.

5. Raising capital by trade credit

Trade credit is also known as supplier credit. This source of capital is the credit relationship between enterprises directly engaged in production and business activities, formed in the credit relationship of sales, deferred payment or instalment payment. In some companies, trade credit in the form of accounts payable can account for up to 20% of the total capital or even up to 40% of the total capital.

There are three types of trade credit:

+ Trade credit granted to importers (export credit) is a credit granted by exporters to importers to promote the export of goods. Export credits are granted through acceptance of drafts and opening of accounts.

+ Trade credit granted to exporters (import credit): is a type of credit granted by importers to exporters for convenient import of goods. Import credits are provided in the form of advance payments for imports.

+ Broker credit for exporters and importers: Large commercial banks usually do not provide credit directly to importers and exporters but through brokers. This type is popular in England, Germany, Belgium and the Netherlands.

6. Raising capital by issuing bonds

Corporate bonds are securities with a term of one year or more issued by an enterprise, showing the debt obligations that the enterprise must pay to the bond-owning investor for a specific amount (par value of bond), for a specified time and with a specified yield.

According to regulations, the subjects that are allowed to issue corporate bonds include:

+ Enterprises that are allowed to issue bonds are joint stock companies and limited liability companies established and operating under Vietnamese law. Bonds in this case are called corporate bonds

+ Organizations and individuals involved in the issuance of corporate bonds, also known as government organizations such as the State Treasury. Bonds in this case are called treasury bonds

+ Government. Bonds in this case are called public bonds or government bonds

Bond buyers, or bondholders, can be individuals or businesses or governments. The name of the bondholder can be listed on the bond (in this case called a registered bond) or not written on it (anonymous bond).

In addition to the above forms of capital mobilization, enterprises can also take loans from other individuals and organizations; individual and institutional investment funds; financial leasing, etc. As a growth and finance hub for SMEs, GroBanc provides optimal loan solutions, supporting SMEs in the process of raising capital for business operations.

GroBanc – The Growth and Finance Hub for SMEs

Source for reference: VNBA, Duong Gia Law, LawKey Law