Capital InvestmentDefined along with Examples

Written By:
Adiste Mae

What is Capital Investment?

When businesses make purchases of fixed assets for the company such as machinery, land, buildings and other equipment, they will need a Capital Investment.

It typically refers to the amount used to support the long-term growth of the business and can be in the form of cash, loan or assets. 

The capital needed in capital investments usually come from venture capital deals or when businesses enter into financing agreements with traditional banks. 

It is important that businesses have access to capital investments because without it, they will have great difficulty in getting the ground running and starting the business operations. 

How Capital Investment Works

Capital Investment can mean two ways in business: capital investment through cash, and capital investment in the form of physical assets. 

Cash

The money used for capital investments can be provided by an individual, a financial institution or a venture capital group as a loan or as a future share of the profits. 

Physical Assets

Another way to make capital investments is when equipment or other long-term assets are purchased by the executives of the company in order for their business operations to run more efficiently and grow their profitability in the process. 

When cash or physical assets are injected into the company as capital investments, it is clear that money or assets need to come from somewhere.

In most cases, they come from traditional financial institutions, venture capital firms, or angel investors.

The money can also come from multiple investors – when a company goes public and raises money from the issuance of stocks.

When business owners are not able to secure financing from traditional financial institutions, or will not be able to personally raise the funds needed for the purchase of long-term assets, they will have to look for angel investors to help them secure the funds they need. 

When it comes to raising money for a capital investment, there is no maximum or minimum required amount.

Some industries may require higher capital investment than others. 

Special Considerations

For capital investments, business owners make a strategic decision to secure the long-term growth of their company – it can either be to increase their market share, increase their revenue or improve their operational efficiency.

Whatever their end goal is, a capital investment is one way to ensure the future of the business. 

Disadvantages of Capital Investment

Although a capital investment ensures that a company is able to secure their future growth, companies can face disadvantages in the short-term.

While many would agree that the most ideal scenario is if the business uses their own funds, capital investment will require a lot of funding that requires companies to resort to outside financing.

When companies seek outside financing, these downsides will arise:

1. Companies that are growth intensive tend to have a reduced earnings growth in the short-term period. While future growth may have a positive outlook, stockholders are typically apprehensive about seeing reduced growth. 
2. For existing stockholders of a company, when companies issue additional shares of stocks, the value of their shares are diluted which means that their ownership stake in the company is reduced. 
3. Financing is a debt and as such, having huge amounts of debt – no matter the reason behind it – does not look good to investors and stockholders. With high amounts of debt, it can be a hindrance to the growth of the company in the long run.