Share capital

Definition

Share capital is the money shareholders have put into a company in exchange for shares. It sits in the equity section of the balance sheet and represents the owners' invested stake.

In plain terms

When you start a company you issue shares; what shareholders pay for them is share capital. Many small companies start with a nominal amount, then build value through retained profit rather than more share capital.

Why it matters for your company

Share capital, alongside retained earnings, forms the equity a lender weighs against debt in the gearing ratio. A thin equity base can limit borrowing capacity; building reserves strengthens it.

In practice

For a small UK limited company, share capital typically stays modest for years. A founder issues shares to themselves or co-founders at incorporation, often with only a nominal sum actually paid up, and that figure barely changes even as the business grows. What does change is retained profit, which accumulates on the balance sheet alongside share capital as the company trades. Directors sometimes assume raising more share capital is the natural way to strengthen the company's finances, but in practice most established small companies grow their equity base through retained earnings rather than issuing further shares.

A useful habit is checking the share capital figure on the balance sheet against what is actually recorded at Companies House, since the two should match. Discrepancies often point to an administrative oversight, such as a share allotment that was never properly filed, rather than anything more serious — worth tidying up before it complicates due diligence for a lender or investor.

How lenders read it

Lenders reviewing a company's finances rarely treat share capital as a number in isolation. It is read together with retained reserves as part of total equity, then set against total debt to understand how reliant the company is on borrowing versus owner-invested and earned funds, as described in the gearing ratio. A company with a nominal share capital figure is not viewed negatively for that alone — it is entirely normal for small companies — but a lender will look more closely at whether retained reserves have built up over time to compensate.

Where share capital and reserves are both thin, a lender is likely to ask more questions about how the company would absorb a downturn, since a slim equity base leaves less cushion before debt dominates the balance sheet. This is one reason directors are encouraged to review their balance sheet regularly rather than only at year end.