What is Capital Investment?
CONTRIBUTIONS DONE BY JUSTIN MARTZ & JW RAYHONS
It is a critical part of every business to have enough capital to keep the business running and operating on a day-to-day basis. Companies can scrape together cash from savings, as well as from family and friends to get started, and then to reinvest all revenues into the company. This, however, adds stress on business owners that wouldn't exist if adequate capital investment had been poured into the company. In fact, many businesses don't have the proper funding to extend business operations over a two-year period and so end up closing.
When is it useful?
Capital investment is useful to help a startup or existing company have enough capital to sustain operations and grow. Capital investment is thus the amount of money that is invested into a company to meet its business objectives. It is money used by a business to purchase fixed assets, such as land, machinery, or buildings. All with the purpose of sustaining and growing. Capital investment is about helping companies meet their goals. These goals can include:
- To acquire additional capital assets for expansion, which enables the business to—for example—increase unit production, create new products, or add value
- To take advantage of new technology or advancements in equipment or machinery to increase efficiency and reduce costs1
- To replace existing assets that have reached end-of-life (a high-mileage delivery vehicle or an aging laptop computer, for example)
What do investors look for?
When looking for capital investors a company must be aware that investors are looking for a return on their investment and so will review things like:
- The company's business plan.
- The business model.
- The people responsible for running the operation.
- Risk factors.
- The amount of funding needed.
- Long-term needs, such as equipment or machinery.
There are also a number of options to seek after when needing capital investments for your business. Each option has its pros and cons and the will depend on the type and size of business and what is needed. These options include:
- Personal assets.
- Family and friends.
- Banks and SBA lenders.
- Professional investors.
One specific type of capital investment is venture capital. Venture capital is defined as temporary equity investment in young, innovative, non-listed companies that stand out on the market. Investors invest in companies that are low on capital but have high growth potential.
2020 has set a record for venture capital raised in the United States. In 2020, the value of venture capital investments in the U.S. amounted to approximately 130 billion. Now, however, in the first half of 2021, nearly $140 billion has been invested. Investors have moved from being “defensive,” to now seeing opportunities everywhere.
Since capital investment is considered to be an important measure of the health of the economy this means that the economy is looking strong with a lot of new and strengthening business. When businesses are making capital investments, it means they are confident in the future and intend to grow their businesses by improving existing productive capacity. On the other hand, recessions are normally associated with reductions in capital investment by businesses.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
If you are looking for a financial advisor team focused on your unique financial situation, communicates openly, and that puts you and your goals at the center of the relationship, call us at (480) 507-2425 or contact us online. We’d love to meet you.
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