Why Do Companies Need Capital? The Importance of Equity in Business

When evaluating a company, the first requirement is to have capital. But why is capital necessary? It's easy to understand that a company needs money to buy equipment, hire employees, and purchase raw materials. However, why does this money have to be in the form of capital and not borrowed funds?

We've previously attempted to reform the system by transitioning from subsidies to loans, as subsidies were not being utilized efficiently. However, after a period, we realized that relying solely on loans isn't feasible, as an enterprise cannot be sustained solely on borrowed funds. Following the 'subsidy-to-loan' period, we moved on to the 'debt-to-equity' conversion.

Regardless of whether an enterprise is state-owned or privately-owned, it's essential to have its own capital. This capital is used to handle uncertainty in the market. The money put into the enterprise cannot be withdrawn, and the returns on this investment are uncertain. If there are returns, they are distributed accordingly, but if there are none, it's considered a loss. This is why capital was invented - to handle market uncertainty.