Relationship between Firm’s capital structure and personal capital structure

Each and every firm has two basic capitals on its disposal. These capitals are equity capital and debt capital. Equity capital is money of the firm’s owner. In other words it is money of the firm and the firm is free to use the same for all kind of purposes. When firm don’t have sufficient equity capital for any activities it uses debt capital. The debt capital is borrowed money from an outsider. It is borrowed at some cost for some specific purpose. The same is true with our personal capital structure. What we own in form of money is our money and we use that money for all our needs. It is similar to the equity capital of the firm. But in life some circumstances come when we are unable to arrange the required money from our own sources. In this case we need help of someone else who can give the required money for a period of time. The borrowed money is debt capital similar to the debt capital of the firm.
Debt capital is arranged by the firm when it is unable generate or arrange the required money internally. The firm has to return the debt capital with an interest to the debtors. For example the firm wants to buy new equipment or want to set up a new plant for expansion of the business; it borrows from an outsider as it cannot arrange all the money on its own. The firm borrows money for that specific reason with intentions of returning with interests in the given time frame.
Similar is the case with our personal life. For example when we wish to buy a house, maximum of us cannot arrange or afford all the money needed to buy a house. In this case we intend to borrow money from some lenders for an interest for a specific period. We also like firms borrow money for some specific purposes with intentions to return on time with interests.


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