Uses and Sources of Capital Investment

The Uses of Capital Investments

Some of the uses of capital investments include:

• Improving Business Operations: Capital investments aid in improving the efficiency and profitability of your business. For example, when you purchase a new machinery with the aim to cut down the production time and reduce costs, you are making a capital investment.
• Business Expansion: Capital investments are also used for business expansion. When you look to expand your business, you will seek to open a new branch or office, acquire machinery, etc. All such investments are capital investments, made for the purpose of furthering the business objectives.

The Sources of Capital Investments

The sources of funds for capital investmentinclude the following:

• Equity Funds: You can raise capital funds for your company through equities. In certain situations, inviting investors to contribute capital to your company, you will be giving up a share of ownership and profits of the company. In return, your company gets the funds it requires. Equity funds can be raised through several channels including:

Angel Investors & Venture Capital: If you are just starting your business venture, then you can approach angel investors for the initial investment. As long as you have a solid business model and an innovative product or service, investors will want to be part of a new and exciting opportunity where they can come in early on and enjoy growth and success. Once your business starts its operations and demonstrates a potential for growth, you can approach venture capital firms for larger funds.

IPO: When your business has operated profitably for several years, then you can raise capital from the stock market by offering an Initial Public Offer (IPO). In addition to the benefits of raising significant capital for your company, IPOs significantly increase public awareness of the company which in turn, can ultimately help bring in funds.

Funded Debt: Another source of capital investment is debt. An advantage of debt financing is that you don’t have to give away a part of the ownership of the company. On the flipside, you will have to pay a fixed interest rate for the debt. Some of the debt fund sources include:

Banks and Other Financial Institutions: You can generate capital through banks and other financial institutions. As long as your company financials look solid and the company prospects are positive, banks will be willing to lend you funds at a fixed interest rate. You should have sufficient assets in your business so that banks can use that as collateral to provide you the debt.

Bonds: Bonds are debt instruments issued by a company. A distinct advantage you will have here is that you will be able to set the interest for the debt. Plus, you only need to repay the debt plus interest at the end of the specified time period. This is in complete contrast to taking a debt from a bank, where you will have to accept the interest rates set by the bank and will have to make monthly repayments.

• Leasing: Leasing is another way to fund your capital investments, specifically machinery acquisition. If you have sufficient assets in your company and you would like to acquire some machinery for your business, then leasing is a good option. Unlike equity funding, you do not have to give away any share of your company. And unlike debt funding, a lease is not shown as a liability in your accounts. When you lease any machinery, you simply agree to pay a fixed monthly amount to a vendor.

You should consult your financial manager before deciding on how you will raise money for your capital investments. You need to take into account your company’s revenues, growth potential, and assets before deciding on a funding source. Only then will you be able to identify the perfect source for your capital investments — one that is able to fulfill the needs of the business without weighing down on the company.