In simple terms, we can describe a Capital investment as a sum of money provided to a company to continue its business objectives.
The term might as well refer to the acquisition of long-term assets such as real estate, manufacturing plants, and machinery by the business.
It is the acquisition of enough cash, loans or assets to fund a company’s operations. Banks, investors, financial institutions, angel investors and venture capitalists are all sources of capital investment. For example, a restaurant might need investment to update the kitchen with extra equipment.
In essence, Capital investment is only considered to be a capital investment when the purchased asset is a newly purchased capital asset.
Alternatively, an investment that has more than one year life, or which improves the useful life of an existing capital asset.
Interestingly, investors do not provide funds out of charity. They tend to pay close attention to business details such as business plans, models and the management before investment.
Investment capital is used to cover any of the items needed by the business.
although it is not for the funding of operating capital.
What are the types of Capital investment?
It is divided broadly into two main categories and they include financial capital and physical capital.
- Financial Capital.
They say financial Capital to be the cash/amount that handed over to a business by an individual, venture or informal investors. They hand this type of investment over with expectations of returns from the sum of cash contributed by the individual.
In this investment, established companies might make a capital investment by making use of their reserved cash or seek a loan from banks or other lending services. If the company is public, its management might issue bonds to finance the investment.
- Physical Capital.
We describe this sort of investment as the long term assets purchased by businesses to aid faster growth and efficient running.
Companies need to make certain investments for continuity and sustenance and for them to make more profit. Here, they use hard items as replacements for worn-out or damaged equipment to sustain their businesses.
What are the benefits of Capital Investments?
They generally accept the decision of a business to make capital investment as a long-term growth strategy. Companies need to plan and implement said investments to ensure growth, even into the future.
It makes these investments to create a safe atmosphere for operations for a company and also increase operational capacity.
The increase in operational capacity will increase the market value of a company and thus generate more revenue.
Disadvantages of Capital Investments.
A company’s own operational cash flow is always the first funding option for any company, however, it might not cover the expected cost of the company running.
Therefore, the need to consider external financing to make up for the internal shortfall.
Capital investments are for a company’s extended run, and it has downsides.
One major concern is that intensive and ongoing investments often tend to reduce profit growth in the short term. Moreover, stock owners and analysts pay attention to the amount of debt a company has on books.
We advise that the company gets capital investments as they are pivotal for successful business running. However, it has its downsides which companies should consider before making plans.