Total Capital Investment Definition
The total capital investment definition also refers to investing in a firm or other business enterprise with the goal to further its business objectives.3 min read
2. More About Capital Investments
3. Sources of Capital Investments
4. Types of Business Funding
The total capital investment definition refers to two situations. First, it is about investing in a firm or other business enterprise with the goal to further its business objectives. It also refers to capital assets or fixed assets acquired by a firm.
An example of investing for the betterment of a business's objectives would be a restaurant in need of funding to update its kitchen equipment. Doing so not only improves safety and efficiency of food preparation, but the end result is also better service and products for restaurant patrons.
What Investors Look for in a Company
Capital investors provide funds based on the business. In other words, there needs to be a return. Investors are less likely to look at the funding of operating capital than long-term uses. The following areas are the types of funding an investor will consider:
- 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.
More About Capital Investments
Fixed assets are considered the main type of capital investment, which allows operations to increase that leads to a larger share of the market resulting in more revenue. Equity stakes are another form of capital investment. They have an indirect benefit for the investor company by building partnerships or expanding into new areas.
A portion of a capital investment may also be used for working capital purposes. Funding of capital investments may use common or preferred equity issuances or through convertible or straight debt. The amount can vary from less than $100,000 to hundreds of millions.
Sources of Capital Investments
There are several ways to approach finding capital for your business. Weigh each option based on the amount needed, what you will be giving, and what you will receive in return. Each option has pros and cons:
- Personal assets.
- Family and friends.
- Banks and SBA lenders.
- Professional investors.
Personal assets include a business owner's investment and retirement portfolio, personal savings, and home equity. In the event that the business owner invests his or her own resources to get the business started, he or she would retain 100 percent ownership of the company. The proper way to do this is for the owner to loan the business the necessary funds and then set up a payment schedule to repay the loan over time.
Family and Friends
While family and friends as investors is an option, it can be risky because the investors are not business associates but important people in your life. If the business is not doing well and/or on the verge of failing, it can make for tense and strained relationships. If you do take this course, the investment is usually in the form of a loan or the person has an ownership interest in the business.
Banks and SBA Lenders
Business owners have access to small programs focused on small businesses providing capital investments from banks and the Small Business Administration. The loan may be for the purchase of real property along with equipment and machinery.
Crowdfunding is a digital way for entrepreneurs to raise funds by tapping into thousands of investors online. These programs have made it easier for businesses to raise the necessary funds to launch a new business or product.
A professional investor is usually referred to as a venture capitalist or an angel investor. Venture capitalists primarily work with large financial institutions, while angel investors focus on newer enterprises in their first years of doing business. Professional investors may choose to take on a managerial position versus that of a silent investor to ensure the company grows to the appropriate level to turn a profit for the investor.
Types of Business Funding
There are basically three types of business funding: equity, debt, and leasing.
Equity financing results in the investor receiving some level of ownership in the company for their investment.
Debt financing equates to getting a loan and is seen as a less risky investment venture. If a company is experiencing financial hardship, the order of repayment is payroll, taxes, loans, and equity.
Lease financing allows a business owner to obtain essentials with less capital investment.
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