Capital investment is the sum of money provided to the company to regulate its further business operations. The term can refer to a business acquisition of long-term assets like manufacturing plants, real estate, and machinery.
How Capital Investments Works
Capital investment has a broad meaning. It can be defined in two different ways:
- An individual or a group may hand over a certain amount of money as a loan or with a promise of repayment or even with a share of profit after years. This is called a capital investment in a business. In this sense, capital means cash.
- The executives of the company may invest in the business. They buy long term assets that help the company to run more efficiently or even to grow faster. In this sense, capital means physical assets.
In both ways, money or capital investments have to come from somewhere. A new venture might seek capital investment from any source, including venture capital firms, angel investors & traditional financial institutions. The capital being invested is further used to carry out the various operations of the company. However, if a company enters into capital markets, it is acquiring a large number of investments from different investors.
In terms of an established company, it might make a capital investment using its cash reserves or may also seek a loan from the bank. If it is a public company, it might also issue bonds to fulfill financial investments. It should be kept in mind that there is no minimum or maximum capital investments. It may start from as low as $10,000 for a start-up and go up to hundreds of millions of dollars.
The company may make a capital investment in the form of the equity stake in another company’s complementary operations. This is done with the same purpose as the shareholders invest.
Disadvantages of Capital Investment
The initial funding for Capital Investments is done by the company’s operational cash flows. However, sometimes they may also be not enough to cover the anticipated costs. Therefore, it is more beneficial for the company to get some financing from outside. However, this should be done only if the company is left short with some amount. A company can be benefit from Capital Investments in the long run. However, it can have short term downsides.
Higher capital investments tend to reduce the revenue and growth of the company in the short term. This is never a positive move for the shareholders of the public company. Moreover, the investors of the company always continuously watch the total amount of debt.
A decision by a business to make a capital investment is termed as the long-term growth strategy of the company. The company acquiring capital investments ensures proper growth in the upcoming years. Capital Investments are usually made to increase operational capacity or to capture the large share of the market, which helps to generate money.