Capital Investment: Definition, Types & Examples

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In the course of running your business, there will be times when you’ll need to make improvements, and hopefully, there will be times when you need to lay the groundwork for growth. In both of these situations, you’ll need money. The funds might come from your cash reserves, in the form of a loan or from investors.

Capital Investment Definition

A friend lends you money to buy do-it-yourself dog bathing stations for your dog-grooming business. You’ve made an agreement with her to pay her back with the profits you make from offering this additional service to your customers. She’s just made a capital investment in your business.

You own a cannabis dispensary and decide to buy a piece of property on which to grow your own marijuana instead of purchasing it from growers. You’ve just made a capital investment in your own business. Capital investments generally fall into two categories:

  1. Money provided to a business to help it meet its goals
  2. Money a business uses to buy long-term assets

Either way, it’s capital used to help ensure a business’s long-term success. It’s completely separate (or should be) from the working capital you use to meet day-to-day expenses like employees’ salaries and the utility bills.

Your Capital Investment Decisions

Small capital investment decisions you make for your company, like when to buy new computers or update the fixtures, come in stride with running the business. However, a variety of factors will go into deciding when it’s best to make a capital investment in your business’s growth.

What kind of business you have and what’s going on in the economy and with your market will all be part of the decision-making process. However, a few major factors are always on the list. They are:

  • You’ve been profitable enough for at least three to five years to have some cash reserves.
  • You have a strong and loyal customer base.
  • You’re always way too busy.
  • The industry you’re in is expanding.
  • Your gut tells you to do it.

There is one hard-and-fast rule that should always be followed: Never, ever, under any circumstances should working capital be used for a capital investment.

Capital Investment Decisions of Others

Decisions others make about investing in your business’s growth are usually based on how viable your business is and how good its chances are for growth. On a grand scale, an initial public offering is a capital investment. Each company or individual who buys stock during an IPO is making a capital investment in the company that's just gone public.

When a business decides to get itself listed on the New York Stock Exchange or NASDAQ, it goes through a rigorous and lengthy legal process that begins with choosing an underwriter and ends with transitioning to market competition. A lot of due diligence is done, and a lot of regulators, primarily the Securities and Exchange Commission, have to be satisfied.

Small business owners are more likely to ask friends, family and a bank for loans. While friends and family may make their capital investment decisions based simply on their relationship with you, any institution handing over capital investment funds will require a lot more than that. It’s like applying for a home mortgage but harder.

Alternative Capital Investment Funding

These are the most obvious sources of capital investment funds for the small business owner but plenty of alternatives are out there. New and ready-to-grow entrepreneurs have turned to crowdfunding platforms like Kickstarter or Indiegogo.

Although these two are among the most widely used online funding platforms, there are many more. Some are for specific kinds of entrepreneurs, like iFundWomen, which was recognized by NASDAQ as one of the 10 best sources of funding for women entrepreneurs.

Venture capitalists are another source of capital investing funding. A little online research will yield many venture capital firms looking for good investments. You can approach them individually, or you can post your pitch on websites that venture capitalists peruse to find opportunities. Be aware that some venture capital firms only invest in startups, while others focus on existing businesses that want to grow, and others do both.

References

About the Author

LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business. In addition to writing for PocketSense, she writes for , Budgeting the Nest, Legal Beagle, PocketSense and Zacks.