There are two types of capital investment in Business because the term “Capital Investment” has two meanings in business circles.
Firstly, capital investment refers to company money in the bank which is used by a business to acquire fixed assets, such as Land and Buildings, Plant, Machinery and Equipment, or Vehicles.
Secondly, capital investment refers to money made available by outside shareholders and financiers for investment in a business with the clear understanding that the money will be used to acquire fixed assets, such as Patent Rights, Land and Buildings, Plant, Machinery and Equipment, or Vehicles., rather than used to cover the business’s day-to-day operating expenses.
For example, to acquire the additional capital assets it needs to grow, a business may need to seek a capital investment in the form of equity financing from investors or venture capitalists or debt financing from a financial institution or a mixture of both.
Capital Investment Objectives
There are typically three main reasons for a business to make capital investments:
1. to acquire additional capital assets for the purposes of expansion, which enables the business to increase production or create new products or add value by enhancing existing products;
2. to take advantage of new technology in equipment or machinery or advanced methodology to increase efficiency and reduce costs;
3. to provide funding in order replace existing assets that have reached end-of-life.
Capital Investment and the Economy
Capital investment is seen as a very important measure of the health of the economy.
When businesses are investing, it means that they are confident in the future and intend to grow their businesses by improving existing capacities.
On the other hand, reduced capital investment indicates recessions.
Railway companies are notoriously capital intensive, requiring regular investments in line upgrades, rolling stock and facilities. This work will include the replacement of rail, sleepers, ballast and other track materials, bridge improvements, electrification and targeted crossing upgrades.
Even small businesses can be capital intensive. A small earth-moving firm, for instance, may require a substantial capital investment in machinery such as bulldozers, rock breakers, diggers and trucks.
Non-Capital Intensive Businesses
Non-capital intensive businesses include consulting, software development, finance, or any type of virtual business.
Note that capital expenditures can vary greatly from year to the next due to various risks and conditions, for example:
1) timing point in the business cycle,
2) the relative financial health of the business, and
3) the need for one off expenditures in an emergency, etc.)
Financing a Business That Requires Capital Investment
For entrepreneurs, breaking into a capital-intensive industry can be very difficult as it requires a great deal of capital on the table.
Even if you have a great idea and a very strong business plan, financing a capital-intensive business can be very challenging irrespective of the type of business.
For example, the banks may have no problem financing a builder for a new housing project (particularly in a strong property market), but much more reluctant to lend to someone who wishes to open a restaurant in an industry that is known for high failure rate. As security for the loan with collateral, a house development is likely to be far more appealing to the bank than a restaurant.
If you are unable to find loan finance from a financial lending institution (and do not have a bunch of wealthy relatives or friends who willing to invest in your business), you will most likely need to find investors in the market who can provide equity capital for your business.
Investors will take an equity share in your new enterprise in exchange for providing funding. The most suitable and attractive investor would be someone whom you know, trust, and who trusts you. Someone, who is familiar with your style of business, would be especially useful as they may be able to contribute support, advice and guidance for your venture.