Capital structure refers to the mix of capital a firm would use in financing its business operation. Although such a mix generally includes all types of capital involved in the firm's finances such as preferred and common stock, short- and long-term debt, paid-in capital, and retained earnings, the term has been traditionally referring to two major types of capital and how they relate to each other. It has been often about the debt capital versus equity capital, their proportions, and their impact on the firm's financial performance.
Debt capital refers to any form of borrowed funds that must be paid back according to a certain agreement or contract specifying the key terms such as interest, way and frequency of payments, default conditions, and the like. Based on the extension of time of repayment, there are three types of debt to finance a business.