What Does Capitalization Mean in Business?

If you’re planning to start a new business, you should familiarize yourself with the term “capitalization.” All businesses need capital to produce the goods or perform the services that they sell. Unfortunately, some businesses struggle with capitalization, hindering their growth and overall ability to perform their operations. To prevent this from happening to your new business, you must create a strategy capitalization plan.

What Does Capitalization Mean in Business?

Overview of Capitalization

Capitalization is somewhat confusing for business owners because it has multiple meanings. Market capitalization, for example, refers to the market value of a company’s available shares. In accounting, capitalization occurs when an expenditure is recorded as an asset on the company’s balance sheet rather than as an expense.

In business, however, capitalization generally refers to the initial funding used to start or launch a new business. Before your new business can begin producing goods or performing services for customers, you’ll likely need to purchase a few things. Depending on the type of business you operate, you may need to purchase inventory, insurance, office equipment and hire employees, each of which is a business-related expense that requires a monetary investment. Capitalization is simply the act of funding your new business so that you can cover and these other startup-related expenses.

How Much Capital Do I Need to Start a New Business?

There’s no easy way to tell exactly how much money you’ll need to start a new business. Some businesses require less than $1,000, whereas others require over $1 million. With that said, a study conducted by the Kauffman Foundation suggests the average cost to start a new business in the United States is about $30,000.

Business Capitalization Tips

For an effective capitalization plan, start by estimating how much money you’ll need to start your new business. It’s nearly impossible to pinpoint exactly how much you’ll need, but analyzing expected costs can give you a better idea.

You should then reach out to banks, financial institutions and lenders to inquire about their services. But remember that a loan is just one of many funding solutions. Whether it’s secured or unsecured, a loan will place your business — or yourself if you obtain it under your personal name — in debt. Equity-based funding solutions like venture capital and private equity, on the other hand, won’t place your business in debt. They allow you to raise capital for your new business by selling some of its shares to an investor or investment firm.

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