Difference between Owned and borrowed capital

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.

Borrowed capital

This is capital which the business borrows from institutions or people, and includes debentures:

• Redeemable debentures
• Irredeemable debentures
• Debentures to bearer
• Ordinary debentures

Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

• Preference shares/hybrid source of finance
• Ordinary preference shares
• Cumulative preference shares
• Participating preference shares
• Ordinary shares
• Bonus shares
• Founders’ shares

These have preference over the equity shares. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.