Capital investment is to possess enough money in cash or loan or in the form of assets that helps in the operation of a company. There are different sources of capital investments like financial institutions, venture capitalists, banks, investors, and angel investors. The capital invest required by companies differ from one another. The purpose of the requirement is also unique as all companies do not deal with the same thing or in the same way. One small example of capital investment to earn more by investing less is a restaurant investing capital to improve its kitchen and update it with new equipment. The new equipment will increase the speed of work and enhance the safety of the staffs involved in cooking and other services in the restaurant. The staffs become more consistent with their works and hence deliver the quality end product to the customers visiting the restaurant. This is a very brisk example of capital investment.
Convincing Investors To Fund Business
Investors do not invest out of kindness they look for full proof plans before offering funds. They will bear the risk only after analyzing a business model, the complete plan of the business and the leader operating a particular business. They cross-check different aspects to get determined if it is worth it to take the investment risk. The investors will determine the capital investment necessary for any operation and also a requirement for the operation of equipment and machinery in the future ahead. Capital investment is useful as it covers all these objectives and items. It is quite less utilized for operating capital funding.
Different Types Of Financing Options
Basically there are three main ways of funding; however, they can be mixed with one another as per the need of a business. The three financing methods are
- Equity financing
- Debt financing
- Lease financing
In this type of financing, the investor gets some ratio of ownership in the firm or organization to which he or she is providing funds and making the investment. It is similar to buying some stock from the stock exchange. In this, the owner of the business is at a risk of a takeover and losing his or her company if the investor ends up getting the majority of the shares of the company through investment. At the time of starting a company, the owner makes a minimal investment in the beginning and the sweat equity that is the energy and time the owner has invested in the business. Investors will look for owners who have actually invested some cash in the company. This is having skin in the game.
This funding is actually like taking a loan. Some investors consider this type of funding to be less risky than other forms. They know if the firm faces a hard financial time or crisis the order of getting repayment will automatically be payroll, followed by taxes and loan and then will come to the equity investors if there is any.
This type of financing is normally taken for purchasing large machinery, equipment or vehicle that would assist in the operation of a business. These items are generally quite expensive and tend to get outdated fast. There is depreciation in their functioning. Through lease financing, the owner of a company can update the machinery and get a more advanced model in a short time. Thus they can get things with much less capital investment. This indirectly helps the company to grow and make profits. There are banks and other financial institutes that offer these types of financing.
How Are A Capital Investment And Economy Co-Related?
Capital investment can end up to be an important scale of measure for the condition of an economy. The businesses which are thinking of making the capital investment are intending to grow in the near future by enhancing their capacity of production. The condition of such businesses is confident and good. Normally the decrease in the capital investment is related to the recession in a business.
Objectives Of Making Capital Investments
- There can be several reasons behind making a capital investment by a business. The top three reasons are as follows
- In order to expand the capital investment is made by a business. It can help in launching new products, enhance the production of a unit, and add value. These are a few examples where the capital can be invested.
- To take advantage of today’s technologically advanced techniques and bring advancements and improvements in machinery and equipment. This will reduce cost and at the same time increase efficiency.
In order to replace equipment, machinery, and assets those are out-dated or are at the point of breaking down. Some examples are like an old computer, a high mileage vehicle used for delivery and etc.