Capital Investment: Meaning, Definition, Types and Examples

Capital Investment Meaning, Definition and Examples

If you are a business owner, or you wish to become one, it is crucial to understand the meaning of capital investment, and how it can be used to benefit your company.

Finding investors is always tricky, and finances play an essential role in maintaining a company business.

The goal of this article is to educate you on the subject and provide enough information about the types of capital investments you can use.

 

Capital investment: Meaning and Definition

So, what is a capital investment? Well, simply speaking, it is an amount of money provided by different investors:

  • private investors
  • banks
  • financial institutions
  • venture capitalists
  • angel investors

There are many other sources of capital investments.

Once you acquire an investment, you can use it to purchase real estate, finance manufacturing plans, and acquisition of assets.

 

How it works

However, you should know that investors do not give out money for free.

Before giving out investments, they look at the business plan and model.

Furthermore, they talk to the company owners about production costs, equipment, and long-term goals.

If they assess the situation as an opportunity for a successful business, investors are willing to provide fundings and help you start your business.

 

A group of businessmen and businesswomen analysing data graphs.
To get capital investment, first, you must present your business plan to investors.

 

In return, they usually ask for a percentage of the company, royalty fees, or simply return of investment in the form of monthly repayments.

It is also important to understand that a large number of private investors don’t always get their money back. For that reason, they are always looking for foolproof plans to invest in.

Of course, most of that solely depends on the source of investment you find.

 

Different sources of capital investments

Finding funding sources mostly depends on the amount of money you need, and what you are planning to spend the money on.

If you take that into consideration, you can divide sources of capital investments into five categories:

  1. Personal sources
  2. Friends and family loans
  3. Banks
  4. Crowdfunding
  5. Professional investors

 

1. Personal sources of investment

These sources represent the owner’s personal savings or any home equity.

If you, as a business owner, have enough money to start the company and finance the production, equipment, and all processes out of your pocket, you can keep 100% of your business.

However, all the risk is on your shoulders.

 

2. Friends and family loans

If you ask me, looking for loans from family members or friends is a double-edged sword.

While it can be a lot easier to return the money, the pressure is also higher if your business fails and you cannot repay them.

Furthermore, they are not businessmen, so all the funding you will get will be their personal savings for general living expenses.

 

3. Banks

All banks have programs for startup companies that include capital investments.

Do research with your local bank, and ask about SBA loans. You can use them to purchase equity, equipment, and a lot more.

A close-up of an ATM machine.
SBA loan programs are one of the best options for all startup companies.

 

4. Crowdfunding

Crowdfunding is one of the most popular ways of obtaining capital investment.

The example of crowdfunding projects is Kickstarter, where you can present your project and collect fundings for development from all around the world.

In the past, you had to offer stocks in exchange for funds, but today the entire process is made easy and simple.

 

5. Professional investors

Professional investors know what they are doing. They are all experienced businessmen, who often work with large financial companies and institutions.

One major difference is that professional investors will not just lend you money and act like a silent partner.

In most cases, they want to be included in managerial processes and production, in order to secure the return of investment.

They will offer you valuable business advice, but may also want a part of your company in return.

 

Capital investment from the angle of investors

With the variety of funding sources and the types of business funding, you can find almost anything you need.

The mix-and-match system will allow you to obtain the best form of capital investment depending on the job you run.

Still, it is crucial to understand that each investor may offer you a different type of business funding that suits his or her needs.

 

Debt funding

One way of finding capital investments is through the process of debt financing.

Simply speaking, an investor gives you a loan in the form of a debt that you have to return upon the agreed timeframe.

This type of funding is the least risky for investors, and it also pays out more, since the repayment fee is usually higher than the loan.

Capital Investment Meaning, Definition and Examples
Debt funding is the best option for all investors since it is the least risky and has the highest return of investment.

 

Equity funding

A majority of investors like to ask for company equity in return for the capital investment loan. It is the same as buying company stocks.

The danger in this type of funding is that you can lose the majority of the company ownership to investors.

 

Lease funding

Lease funding is an excellent option for anyone looking for capital investment to obtain equipment, machinery or vehicles for the business.

All of these items come with a hefty price. Furthermore, maintenance also costs a lot of money.

With that in mind, it is better to lease them than to purchase.

Also, it is much easier to update the equipment to newer models instead of purchasing new equipment.

 

Business relocation with capital investment

Is it possible to use the capital investment to relocate your business?

Well, yes and no. If you are looking for a way to pay expenses for your employees, corporate goods transferred to another address, or to simply cover the relocation company expenses of disassembly, assembly, and packing, you cannot use the capital investment for that.

However, you can purchase office space at the new location.

 

Capital investment presentation

I really hope that you now understand the definition of capital investment, and examples of all the types of funding you can find.

When looking for capital investment, the most important detail is to prepare a well-thought-out business plan.

Go through all the sectors and topics, analyze every detail, and have all answers ready for any question that an investor might ask you.

Investors will want to know everything about the business and the owners they are investing in, so there mustn’t be any grey areas for them.

Investing in a startup is risky, so have everything planned and prepared before approaching investors. Good luck!

Joshua Collins is a business owner with a degree in economics, with over 10 years of experience. In his spare time, he runs a blog about startup companies, offering his advice to young entrepreneurs looking to find a way into the small business industry.