Capital investment companies buy equity in a business as a way of providing money to buy capital assets. The idea is that these assets will help the business grow, thus benefiting both the business and the investment company. Usually a business turns to capital investment companies as an alternative to debt-based fundraising such as loans or bonds.
From a legal standpoint, there is no distinction between capital investment companies and ordinary investment companies or even individual investors. The difference, from a practical standpoint, is that the capital investment company will usually invest on the basis that the money will be used for a specific purchase of a capital asset. These assets can include machinery, factories and other equipment. The key is that the money is to be spent with the specific aim of growing the business rather than simply financing day-to-day activities.
There are several variations of capital investment companies. Venture capital companies traditionally aim to invest in businesses that are relatively small and young. In many cases, these will be businesses that work with a new technology or idea and thus need to grow quickly to take advantage of it. On the investor’s side, venture capital is more risky in such cases, as there is a greater chance of the company failing, but the potential rewards can be high if the company succeeds and then floats on a stock exchange.
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The term growth capital is normally used for equity investments in a well-established business. This type of investment usually takes place when the business needs to finance a significant change in its operations. For example, a widget producer might decide it would be more economical to buy its own fleet of trucks than to carry on hiring transport services. Selling a stake in the business to a capital investor in such a case might seem more attractive than taking out a loan, which could require the company to put up an asset as security and then pay high interest rates.
In principle, capital investment companies need offer nothing to a business other than the money for the equity stake. In practice, however, some companies may offer business advice or provide access to a network of contacts. This can make the capital investment more attractive to the business, but it also serves the interests of the investment company by increasing the chances of the business succeeding and providing a good return on the investment.