Legal Definitions - borrowed capital

Borrowed capital refers to funds that a business or organization acquires by taking on debt, rather than through direct investment from its owners or from its own accumulated profits. This capital is used to finance various aspects of its operations, growth, or other financial needs, with the fundamental obligation that it must be repaid to the lenders over a specified period, typically with interest.

Here are some examples to illustrate the concept of borrowed capital:

• A small manufacturing company needs to purchase new machinery to increase its production capacity. Instead of using its limited cash reserves or seeking new equity investors, the company applies for and receives a business loan from a bank. The money provided by this bank loan is considered borrowed capital because it is a debt that the company must repay, allowing it to fund a significant operational upgrade without diluting ownership or depleting its own funds.

• A large real estate development firm plans to construct a new commercial office building. To finance this multi-million dollar project, the firm decides to issue corporate bonds to institutional investors. The funds raised from the sale of these bonds represent borrowed capital. The firm is essentially borrowing money from bondholders, promising to pay them interest over time and repay the principal amount at maturity, thereby funding its large-scale development project.

• An online retail startup experiences rapid growth and needs to significantly increase its inventory to meet customer demand, but its cash flow is temporarily tight. The startup secures a revolving line of credit from a financial institution. When the company draws funds from this line of credit to purchase more products, these funds are classified as borrowed capital. It provides the necessary working capital to manage inventory and fulfill orders, with the expectation that the drawn amounts will be repaid as sales revenue comes in.