If you want to set up a business, you need capital to buy land, buildings, equipment and so on. This capital which one uses to buy other assets is called Financial Capital or economic capital. It could be in the form of money, bank deposits, equity stock and debentures and other kinds of bonds.
Equity capital is the capital contributed by the shareholders. When a business is being started or is being expanded, the owner requires funds which he himself may not have. If the business is going to be a fairly large one, he can raise the required capital by a public issue. He advertises this issue of equity, and people who wish to participate in the business apply for the equity shares to be issued. If they are allotted equity shares, then they become part owners of the company. However they cannot claim any return on their investment as a matter of right. When the business makes profits, these may be distributed among the equity shareholders as dividend. This kind of capital is usually raised by large companies. Small businesses may find it difficult to issue equity as it is an expensive affair and moreover, there are regulations regarding to the minimum amount of equity capital that can be issued.
Debt capital is the Financial Capital borrowed from others. The lenders may be a bank, an institution, bondholders or even wealthy individuals. These lenders are paid interest at a predetermined rate. In comparison with equity capital, this is an easier way of raising Financial Capital and many businesses both large and small adopt this route. The catch is that interest has to be paid irrespective of whether the business is doing well or not. In case of equity capital, dividend payment is not mandatory.