Business Finance Money

Capital Investment: Meaning, Definition, and Types

Capital Investment: Meaning, Definition, and Types.
Written by Ayush Porwal

Meaning

The term capital investment has two usages in any business, and they are:

  • A capital investment can be made by the company’s executives in their company by buying the company’s long-term securities/assets. In such instances, the capital could be physical assets that could significantly improve the company’s performance. And,
  • The money invested in the business to purchase fixed assets rather than investing it to cover its daily operating expenses. For example, a growing business may need to look for capital investment in debt financing from a financial institution or equity financing from angel investors or venture capitalists to purchase additional capital assets.

Definition

Capital Investment is the amount invested in a business to improve its business goals. The person/entity also can earn an income or recover the invested capital from earnings generated over the years by the company.

Objectives of Capital Investment

After knowing about the capital investments, now the question comes what the reasons for a business to make a capital investment are. So the answer is very simple:

  • To acquire additional capital assets for expansion, allowing the company, for instance, to increase the production of units, produce new products or add value.
  • Using emerging technologies or advances in equipment or machinery to improve productivity and minimize costs.
  • Substituting current assets that have reached the end of their lives (a high-mileage delivery vehicle or an aging laptop computer, for example).

Types of Capital Investment

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Capital investments are categorized into two broad categories:

Financial Capital:  In this method, the cash/amount is handed over to a business by a venture capitalist or angel investor. And it is handed over with expectations ROI from the sum contributed by the individual. 

Physical Capital: In this Method, the executives go on to make capital investments in the business by purchasing long-term assets to help the company grow faster by running more efficiently.

Advantages of Capital Investment

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  • Employment Generation: When capital is invested in starting a company, the owner can continue to hire those employees to carry out daily activities. Additional jobs are thus generated in the country and help to tackle the unemployment problem.
  • Value Creation: There seems to be self-employment when new capital is invested in the business, improving the economy’s GDP and per capita income. If successful, the entrepreneur will make way for the complete creation of a business empire. Further value development in the economy will occur.
  • Economic Boost: Because of the increased economic activity, when an entrepreneur invests in some sector, it improves the economy. Goods and services can now be provided in line with society’s needs, or a company may be managed to address a specific issue.
  • Wealth Creation: Investors will continue to build on wealth if all goes well with the business. The owners will make a significant sum that would not otherwise have been feasible in their daily employment. Investors will make a wise comparison between the return on investment and the IRR and make the correct decision to invest in the business. And if everything is good going, it tends to be wealth for the capital investors and bonus for the employees.
  • Efficiency in Markets and Competition: If it had not been for risk-takers investing in a business, there would be no goods and services to meet the customers’ everyday needs. Also, investing in a similar company that would be a threat from the current company in the same line would help bring about productivity as they would now improve themselves by growing their market share to grab the maximum pie in the market.

Disadvantages of Capital Investment

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  • Chances of Failure: Usually, businesses are a risky enterprise altogether. A minor mistake or miscalculation could cost the businessman all the fortune he has ever created. A corporation will often fail and even declare bankruptcy, even because of market conditions. The work along the way would also be taken away.
  • The subject of Scrutiny: When an enterprise has been set up, the income tax department is often subject to scrutiny, pressure, and intervention from activist investors or private equity investors, constraints and agreements from banks and lenders, as well as the required disclosure from regulators, in case of a public company. Hence a venture is always under constant observation.
  • Resorting to Borrowing: It is also noted that capital, which is the lifeblood of any organization, is not sufficient for the day-to-day operations or requirements. It is therefore imperative for the entrepreneur to turn to debt funding sources to hold his company afloat. As it has to be owed back to the lender and interest, it would put the owner under more debt stress.
  • Psychological Stress: All business involves an element of risk. An entrepreneur can constantly worry about his capital investments in his company, even when on vacation. All phone calls, whether late at night or even on holiday, can require him to attend. He/she will be expected to come to the office first and to leave last. The work-life balance of the entrepreneur may get disturbed and cause health-related problems. 

Apart from the advantages and disadvantages of capital investment, there is a limitation to it. The economy will be boosted by capital investment, but one wrong step into a wrong venture or the acquisition of inappropriate assets that do not add value. The capital contributor’s wealth will vanish away like the ashes.

Financing Capital Investment

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Breaking into a capital-intensive industry can be daunting for entrepreneurs as it needs a great deal of up-front capital. Depending on the type of company, even with a brilliant concept and a strong business plan, funding a capital-intensive business can be difficult.
You would most likely need to find angel investors who will provide equity capital for your company if you cannot obtain debt financing from a lending institution and do not have rich friends or relatives willing to invest in your business.
In exchange for providing funding, angel investors can take an equity interest in your new company. Someone you know, trust, and who trusts you will be the most fitting angel investor. It will be particularly helpful to someone familiar with your business line as they will be able to offer your new venture advice and guidance.
If you also do not have any angel investors and your company is showing extensively higher performance. You can go for the venture capitalists as they provide capital to companies exhibiting high growth potential in exchange for an equity stake.

At the end just keep in mind that if you are doing well, what you have started then there will be a huge line of angel investors or venture capitalists waiting for you to accept their offer.

About the author

Ayush Porwal

Digital Marketer| Blogger| Website Designer