Capital Investment basically refers to the funds invested by a company towards acquisitions or enhancement of its business. This capital can be recovered through earnings made by the company over the years.
The term ‘capital investment’ is also called as ‘capital budgeting’. Without capital investment, a business may face a difficult time getting off the ground.
There are two ways to understand capital investment.
First, capital investment can be made in the form of physical assets like property, plant and equipment (PP&E), furniture. It also helps to enhance the business performance.
Second, the capital investment can also be made in loan form. In this case, investors get their returns by way of repayment of loan or profits from the business.
Generally, capital investment is sought by new companies or startups in any sector. Investors in these businesses can be angel investors, centre capitalists, financial institutions, etc.
As investors mostly invest in a company which has future potentials, they do their due diligence before making any investment. Therefore, the companies must use the money for development of their business to give good returns to the investors in the long term. Similarly, when a company goes for an IPO to list on stock exchanges, the large amount of money pooled in by the investors is also known as capital investment.
Investment always plays an important role in boosting a country's economy. It is a component of AD (Aggregate Demand). Therefore, if investment increases, it will increase AD and eventually help in economy growth in the short term.
For example, when a company makes capital investments, it means they are sure about the future growth of businesses. And when a business grows, it will call for more employment. Therefore, if there is a reduction in capital investment, it will increase the risk of recessions.
Financial capital Investment
Generally, a large amount of money is invested in a business. It can be invested before or during the operations especially when a business is completely relying on the capital to continue.
The sources of capital investment can also be venture capital firms or angel investors who gain attention in some of the companies of their interest which have winning ideas. Other traditional source of capital are bank loans.
Physical Capital Investment
Physical capital investment includes the investment done in the form of buying long-term assets like land, machinery, furniture etc to increase or continue growth of the company.
In both the cases, purchase decision is taken by the management.
Capital investment is used to improve the growth of a company. A company which has been performing well, and can produce and generate more revenue, can go for further capital investment.
This is how capital investment helps an economy, employees, and the management to grow in the future and add shareholder value.
It is universally accepted that everything has few pros as well as cons. We have already discussed the benefits of capital investment, let’s now talk about few disadvantages of the same.