Capital Investments For Business; Pros, Cons And The Sources

  • blog
  • 25th Mar, 2021

Capital investments are the money that is used by a business to purchase fixed assets. Such as buildings, land, and machinery. Capital investment can be in the form of cash or loans or assets. As the word itself, capital investment is, it involves capital; money, and investment. Capital investments help a business to grow and expand. It will help to accumulate more resources for more products and services. Similarly when there is more capital in hand to invest, one should not worry much about problems in the future.

Without capital investments in business, it is hard for a company to get off the ground and expand. Getting more detail about Capital investments. Let us get to know in detail about it and see some examples of it. In a business, capital investment has two uses that are either the money used by a business. To purchase fixed assets or the money invested in a business that will be used to purchase fixed assets later. However, one thing that you need to keep in your mind is that Capital investments are not to be used to cover the day-to-day operating expenses of the business.

Example: When a company or a business wants to grow and add capital assets they seek capital investment through investors/venture capitalists, debt-financing, or equity financing. If you are investing in fixed assets or collecting funds for later to buy fixed assets then that is the capital investment.

Why does a business need plenty of capital investments and how does it work?

Capital investments allow businesses to achieve their goals as they will get what they want. One main reason why capital investment is needed is to acquire additional capital assets to expand. This enables businesses to increase unit production, create new products or add value to their previous products. With enough capital investment, one can replace the existing assets that have been used for a long time. Using old machinery or aging technology will affect your business and to minimize the influence of such things we can use capital investment.

Another advantage is being able to use new technology or advancement in equipment which will increase efficiency, reduce time and costs. The number of defective products or poor service can be minimized if we use new technology and to get it, capital investment is necessary.Although capital investments are useful for a business, it does come with some disadvantages as well.

It seems like an assured and easy way to improve a business but there are potential downsides such as:

High risk and pressure

It might sound simple to invest more in fixed assets to increase production but it never is it as it sounds. There is a high risk of not being able to perform well even if we expand. There are chances of failure when we make a huge amount of capital investment. As a whole, it will not only affect your capital investment but your business as a whole.
After the addition of capital investment, there is more pressure on the management to make things go the right way. While working in such a situation there is pressure for the management to benefit but the pressure might affect negatively as well.

Capital investment is good for a business but there are some businesses that need more capital investment and there are some which do not need any capital business as well.

Capital Intensive business

Capital-intensive business is the one that requires a lot of investments to upgrade the machinery, repair, and labor to regulate it. One business that is notorious for intensive capital investment is the railways. Regular investments have to be made for rolling stock, line upgrades, and facilities. Even on other businesses such as a small earthmoving firm, there is a need for substantial capital investment in machinery.

Non-capital intensive business

Besides the one that requires a lot of capital investment, there are some which require less or no capital investment. Software development, consulting, finance, or any or virtual business are the ones that require a very little amount of capital investment. Sometimes no investment required for a long period of time. Since they do not have a large number of equipment or facilities to maintain or invest in, they require minimum capital investment.

What are the sources of capital investment?

Venture capital (VC)

VC is a form of private equity that investors provide to startup companies that have a long term-term potential. It comes from financial institutions, investment banks, and well-off investors.

Angel Investor

An angel investor or private investor is an individual with a high net worth who provides financial backing for businesses and startups in exchange for the ownership equity in the company.

Lenders

There are lenders which will lend you capital and there are commercial lenders. Other lenders like bank loans or you can consider your friends and family as lenders too.