When running a business, particularly an SME, the focus is often on bringing money in rather than spending it. For these ventures, the priority is to cover the expenses required to meet customer demand while maintaining cash flow across operations.
However, if you want your business to grow, there will come a time where you need to invest in your business. The common saying is that you “need to spend money to make money”, and, to an extent, it is true. Internal spending often brings improved processes and functions, which increase quality while meeting and encouraging higher levels of demand.
This is where capital investment comes in. By acquiring capital assets needed for your business, you can scale your operations and drive demand – this might include the acquisition of plant and machinery, property, vehicles, etc. By using it effectively, you can fuel expansion, improve your company worth and optimise processes.
This blog explains what capital investment is in detail and why it is vital for business.
What is capital investment?
There are two definitions of capital investment, though both have a similar outcome.
The first is defined as money spent by a business on fixed assets, such as property and equipment. Sometimes this is described as an investment in capital goods.
The second refers to the procurement of external finance by a business, under the expectation that the capital sourced will be used to fund growth – such as allowing that business to acquire more assets or upgrade equipment.
In this sense, the two definitions work in conjunction with one another, with the ultimate aim of facilitating growth.
How to access capital investment
The way that you access capital investment will depend on your definition.
If you take the first definition, capital investment comes from the business deciding to purchase assets. However, few companies will have the reserves to utilise for capital goods. This means most SMEs will rely on external finance to fulfil their goals – which is where the second definition of capital investment comes into play.
If you pursue external investment to fund the acquisition of assets, you will need to consider an investor, or other lender to help fund your need. This will usually be provided in exchange for equity in your business (in the case of investment) or interest and repayments (in the case of a loan).
In order to secure the finance you need, you will need to identify the right provider for your company. Finding the best source of capital investment will depend on the amount of funding you want to raise, including your criteria and preferences as a business. This tends to be a straight choice between debt or equity, so it’s worth learning the conditions of both and what your business may be able to raise through each option. Speaking to a financial advisor is worthwhile if you need guidance.
Once you determine the best route for your business, you will have to undergo an application process. You will need to provide supporting information for a loan, and there may be some conditions you need to meet (such as offering a personal guarantee or security) to be eligible. For investment, you will need to provide a business plan to convince investors of the value of your business and assure them they will receive a return on investment by backing you, which typically means proving your growth potential.
When you have successfully acquired the funds you need, your company should utilise them to push your objectives forward and fuel growth. The first step is to make the capital investment that enables you to incorporate new functions, scale up operations or optimise processes as part of your long-term business vision.
The benefits
There are several benefits to introducing capital investment into your business. We’ve listed the most prominent ones below.
- It’s an integral part of any growth strategy. As we have already mentioned, capital investment aims to give businesses the resources they need to move forward. For most, this will mean becoming a larger and more reputable company, such as offering more products and services, filling larger sales volumes or introducing new branches or functions into your operations. By delivering the funding you need to acquire the goods required, you can maintain growth without running into financial barriers that inhibit you.
- It can optimise your business. Another element of capital investment is refining your existing operations to work efficiently (so when you scale up, there are fewer hiccups). It may enable you to replace old or unfit equipment. This should assist you in meeting current and future demand while driving quality and service. The result is more satisfied customers, helping to improve loyalty and word-of-mouth marketing.
- It increases your value. When you use capital investment to acquire assets for your business, you will increase your company value by adding more worth to your balance sheet.
- It makes it easier to attract funding. With increased business value through your assets, it will become easier to secure external finance. Your capital goods may also be used as security against loans, which will allow you to leverage higher sums and minimise interest rates.
- It can introduce innovation. Capital investment can also be used towards technology, such as the latest equipment and software in the industry. While enabling you to drive quality and improve processes, this will also help you embrace innovation and gain an edge over competitors.
- It can drive long-term performance. By investing in assets for your company, you could unlock enhanced revenue, sales and profit for years to come. In this sense, your investment in the present can continue to bring rewards, even way into the future.
What to consider
While many rewards can be unleashed through capital investment, there are considerations you should make before you pursue it. This will help you to ensure your objectives are met and create the environment for long-term growth.
- Ensure you have an effective strategy. If you are pursuing capital investment for growth, you must understand what assets you need and their role in your expansion. This will allow you to predict how much funding you need and ensure that the purchases you make fulfil a purpose. Through this, you can ensure growth happens efficiently, without unnecessary expense to your business.
- Prepare your cash flow. If you are investing in capital goods, it’s likely to put some pressure on your cash flow, particularly while you wait for the results on your performance (such as improved sales and revenue) to take effect. This will be particularly pertinent if you invest your own finances, though it may happen even if you utilise external funding. Make sure you understand the implications ahead of time and have support in place to navigate any cash barriers in the interim.
- Increased debt. Capital investment can result in more business debt, especially if you utilise loans. In the case of investment, this may cause share dilution. This will be watched by your stakeholders and could impact their relationship with your company, so make sure that this does not cause any disharmony or violate any pre-existing agreements you have.
- Finding the right source of funding. As we’ve already touched upon, if you are utilising external support to fund your capital investment, you need to ensure you find a source that works for your business. This means understanding the options available to you such as commercial loans, asset finance, etc and which aligns most with your preferences and eligibility. Take the time to explore different lenders and investors before committing, so you are sure you can accept the potential consequences to your company.
Conclusion
While it’s natural for an SME to have an outward focus, pursuing internal investment and optimisation is crucial for any that want to maximise performance and set the foundations for growth.
Capital investment is a valuable tool in facilitating this, whether by purchasing assets that will support your operations or procuring the external finance used to empower expansion.
By understanding the role that capital investment plays and seeking appropriate funding sources, you will be able to fulfil your overarching objectives and reap the rewards – including better revenue and profit.
If you seek funding to invest in capital goods or want to find out what route to capital investment may be best for your business, we can identify options to help.