Capital investment refers to investments that promote a long-term business growth strategy. One example of capital investment is the purchase of a fixed, long-term asset — such as equipment or a manufacturing plant. Another form of capital investment is a cash investment one party makes into a business. Capital investments can help businesses generate more revenue, capture a larger market share and increase operational capacity.
Capital Investments vs. Working Capital
Capital investment is not the same as working capital, which is the money used to sustain daily operations. Capital investment’s purpose is to propel a business forward.
Small business owners can use capital investment to grow their businesses through location openings, product launches and equipment purchases that increase efficiency and productivity. Let’s go a little deeper and look at some examples of capital investment.
Capital Investment Examples
Capital investment can refer to an investment in a business with the intention that the investment will be used to purchase fixed assets that help the company run more efficiently or grow faster. This can come from an individual, such as a family member. It can also come from a venture capital group or a financial institution, such as a bank. The capital investment can be in the form of a loan; it can also be a promise of repayment or for equity, which is for a share of future profits.
Capital investment also occurs when a company goes public on the stock exchange. In that instance, it acquires capital investment from many investors.
Businesses can use these capital investment funds to make purchases that will spur growth.
Capital Assets for Expansion
If a business wants to expand, it might need to purchase additional land and buildings. These buildings could be whole locations that help a business increase revenue as it sells more products and reaches more customers. Or, buildings could be manufacturing plants that enable the business to produce more or new goods.
A warehouse is another example of capital investment; it could make order fulfillment easier and reduce transit expenses. Vehicles used to deliver more products to customers can also be capital assets for expansion.
New Technology or Equipment Advancements
Advanced equipment or new technology can reduce business costs and increase efficiency. These investments could include industrial robots, high-tech machinery or new computer equipment.
Software development and the purchase of existing software are capital investments if they help drive business growth.
End-of-Life Asset Replacement
As existing capital investments — including vehicles or computers — decline, businesses will need to replace them. Broken or out-of-date equipment could cause business operations to stall, so replacing these existing assets is a capital investment.
Business, Branding & Intellectual Property Acquisition
In some cases, business growth comes from buying another business. Companies might also want to purchase branding from another company. Purchasing intellectual property — such as a patent or copyright — can also drive business growth.
5 Ways to Finance Capital Investments
There are several ways to finance capital investments. A business owner could use personal savings. If that’s not an option, a business owner could obtain a short- or long-term loan as well as look to a venture capitalist for funding. However, the latter option could affect the ownership rights of the business. Check out the following opportunities for capital investment funding:
1. Operating Cash Flow
A business can use its operating cash flow toward capital investments. It’s important to be aware that as cash flow declines, a business can become vulnerable to being unable to sustain daily operations. When a company’s profits decrease because the business isn’t making back the investment, it can negatively impact how analysts and stock owners view the company.
2. Personal Resources
Business owners who have the personal capital to fund capital investments might want to use their own assets. These include personal savings, investment and retirement portfolios and home equity. Using personal assets can benefit business owners because it allows the owner to retain complete company ownership.
Some small business owners will ask personal contacts such as friends and family members to invest in a business. This can be a quick way to access capital, but the process can also put a strain on relationships. It helps to have paperwork in place that explains the capital funding use, terms of repayment, etc. if you’re going to use this method.
3. Lenders and Banks
Business owners can approach lenders and banks for debt financing in the form of a loan. The drawback to relying on a financial institution — such as a bank — for capital investment financing is that the loan application might be rejected if it’s considered too high risk of an investment.
For example, capital-intensive businesses with high rates of failure, might not be as likely to secure funding from banks. Alternative online lenders might be better financing options.
The U.S. Small Business Administration (SBA) funding programs are available as well. Various SBA lenders can finance businesses with loans that are guaranteed by the SBA — to a certain percentage — making the loans less of a risk for the lender. The SBA also regulates Small Business Investment Companies (SBICs). These companies use their private funds and SBA-guaranteed funding to invest in small businesses through debt and equity, according to the SBA website.
4. Venture Capitalists and Angel Investors
If you’re familiar with the TV show “Shark Tank,” you understand the role of angel investors and venture capitalism. Angel investors and venture capitalists provide equity financing. This means they’ll provide an up-front investment in return for a share of the company.
However, there’s a difference between a venture capitalist and an angel investor. A venture capitalist might be a person or a firm that invests in businesses from a pool of money. The pool consists of funds from groups like investment companies and large corporations. An angel investor is an individual who uses personal money to invest.
The best venture capitalists and angel investors to work with are people or firms who are familiar with your industry and who would be able to provide advice and guidance for your business.
Before making a financial commitment to your business, most investors will want to see that working capital exists, and that it’s being wisely used to manage business growth.
It’s also important to consider the equity amount. If the equity owner or owners possess most of the business shares through investment, the business owner can lose control of the company — or the company altogether — through a takeover.
Crowdfunding is the process of presenting a capital investment need to the public. Crowdfunding platforms include Kickstarter, Indiegogo and GoFundMe. Multiple investors then have the option to invest smaller amounts. In exchange, investors get rewarded.
For example, say a board game designer needs funds to produce a board game. She could launch a crowdfunding campaign. Early investors give the designer $25 each. Then, each investor would receive a copy of the board game once it’s produced.