“Capitalization” refers to the monetary value of the assets of a business, as opposed to its expenses. Initial capitalization or startup capital is simply the money required to get a new business started. A firm's initial capitalization must include funds to buy assets and pay bills until sales start coming in.
The initial capitalization for a business can come from several sources. Entrepreneurs may use their own money or recruit investors. Other sources include bank loans and government grants for small businesses. A new business may even get credit from suppliers looking for new customers.
Normally, a company's working capital comes from operating revenues, but a new business has no revenues to begin with. Initial capitalization must include sufficient cash to cover expenses and provide working capital for day-to-day operations. The amount of cash needed depends on how long it will take for a particular business to begin generating revenues. A restaurant might need a cash reserve for just a few weeks, while a technical innovation firm may require enough for months or even years of product development.
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