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Tata Capital > Blog > Loan for Business > What Is Fixed Capital? Types & Importance

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What Is Fixed Capital? Types & Importance

What Is Fixed Capital? Types & Importance

There has been a noticeable change in the Indian mindset regarding potential career options. Unlike before, the younger generation is aspirational, with more individuals eager to start their entrepreneurial journey.

A report by the Global Entrepreneurship Monitor (GEM) states that India's entrepreneurial activity rate– the percentage of adults who have started their businesses, has increased from 5.3% in 2020 to 14.4% in 2021. Such a spike is a testament to India’s changing sentiments.

However, before you begin your entrepreneurial journey, it is essential to understand the nuances of business– starting from being aware of the basic business-related terms.

In this article, we will be talking about one of those basic yet fundamental aspects of business, fixed capital. Read on as we better understand this term and unravel the significance of fixed capital in a business plan.

Fixed Capital Meaning

Fixed capital represents a business’s capital asset that is intended for the company’s long-term use, such as factories, machinery, and land. Since the capital is used to purchase assets for prolonged use by the business, this sum is often also called “Blocked capital.”

Unlike other capital or assets, the fixed capital method of investment is not meant to be resold in the shorter course of business. Instead, these assets are used for an extended period. The primary reason behind this is that most of these assets are not liquid– which means that they do not have much demand in the market. Hence, it takes a long time to sell such assets.

Assets that fall into this category are also subjected to depreciation due to their extended use by businesses.

Types of Fixed Capital

In general, fixed capital can be categorised into two types, these are:

1. Tangible Fixed Capital

Tangible assets are a specific category of fixed capital that is physical; hence, these assets can be seen and touched. It includes assets such as machinery, buildings, vehicles, and land, as they have a physical presence and a transactional monetory value.

2. Intangible Fixed Capital

In contrast, intangible fixed capital refers to non-physical assets that provide long-term value to a business. Examples of intangible fixed capital include patents, copyrights, trademarks, and software licenses. While these assets lack a physical presence, they are crucial for enhancing the overall worth of a company.

Fixed Capital Financing

Securing financing for fixed capital is a pivotal decision in business operations. Here are some of the ways you can finance your fixed capital:

1. Equity Financing: This method entails generating capital by issuing and selling company shares. It's a way to raise funds without incurring debt, but it does require sharing ownership and potentially some control of the business.

2. Debt Financing: This involves raising capital by borrowing funds, typically through business loans or issuing bonds and debentures. This is a great method of raising capital as it is less costly, the company retains ownership control, enjoys tax deductions, has access to even a small capital amount to create growth.

3. Leasing: Instead of purchasing fixed capital assets outright, leasing offers a way to use them for a period. This option avoids the upfront costs associated with buying and can include maintenance and upgrade options, making it a flexible choice for businesses managing their capital expenditures.

Importance of Fixed Capital

Fixed capital offers a monumental contribution to a successful business operation. The following points better explain its importance:

1. Enabling Long-term Operations: Fixed assets like machinery and buildings are essential for the ongoing operations of a business. They provide the necessary infrastructure for production, administration, and logistics.

2. Investment in Growth: Investing in fixed capital is often a sign of a company's commitment to long-term growth and expansion. It indicates a readiness to scale operations and enhance capacity.

3. Financial Health Indicator: The value and state of a company’s fixed assets can be a key indicator of its financial health and operational efficiency. For instance, a factory with advanced machinery can produce goods at a higher volume and quality, resulting in increased revenue and better financial health.

4. Competitive Advantage: Intangible fixed capital, such as patents and trademarks, can provide a competitive edge in the market. These assets can protect a company's intellectual property and create barriers to entry for competitors.

5. Collateral for Financing: Fixed capital assets, especially tangible ones like real estate and machinery, can serve as collateral for obtaining loans and financing. This helps in raising capital for expansion projects.

Challenges Associated with Fixed Capital

While fixed capital offers numerous advantages, it also presents challenges to businesses:

1. High Initial Investment: Most of the tangible assets acquired through fixed capital, like machinery and plots, require a significant initial investment. This can be an issue for someone who is starting their entrepreneurial journey and can strain a company’s finances.

2. Depreciation: Tangible fixed capital assets can depreciate over time. Depreciation can cause a reduction in the asset’s book value and potentially impact a company's financial statements.

3. Technology Obsolescence: Rapid technological advancements can render certain fixed capital assets, especially technology-related ones, obsolete. This may necessitate frequent upgrades or replacements.

To Sum Up

Fixed capital represents a significant aspect of a company's investment. Its contribution to shaping the operational capabilities and ensuring the growth of a business cannot be underestimated. With effective management and financing of fixed capital, you can ensure sustained success for your business in the long term.

Searching for the perfect place to finance your fixed capital investment? Look no further than Tata Capital. Offering collateral-free loans with a streamlined application process, Tata Capital ensures that you get access to your required funds within just a few days.

Visit our website to find out more about the business loan documents required and gauge your requirements with our intuitive business loan EMI calculator.

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