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What Is a Capital Infusion?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 13 September 2016
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Capital infusion refers to the process whereby funds are injected into startup companies or ailing companies by an investor with a financial interest in the company. Capital infusion also refers to the process of transferring money from a successful unit, division or subsidiary of a company to another unit that is not doing well with the aim of injecting new life into that unit. This type of capital infusion applies to big organizations where the operations are split into different subsidiaries with their own stake in the company, all working toward the common goal of profitability for the organization.

One example would be a company that manufactures hair products, cosmetics, diapers, kitchen utensils and vacuum cleaners that could be split into subsidiaries. It would have separate units for the production and marketing of the kitchen utensils, vacuum cleaners, cosmetics and baby products. If the baby products unit, cosmetics unit and kitchen utensils are showing a profit while the vacuum cleaner unit is barely making any returns, the management of the company could decide to inject funds from the other units into the vacuum cleaner unit in order to give it a much needed boost. This is an internal capital infusion.

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Some startup companies may have a good premise or potential but lack the required funds to really get the company off the ground. A venture capitalist could decide to step in and provide the capital infusion needed to do necessary improvements like purchase equipment, lease a suitable space, hire and pay employees, and furnish office space. Venture capitalists are professionals who provide much needed capital infusion to startup companies. The investor may also be a benefactor or a business associate with a monetary stake in the outcome of his or her investment. Such a person will only make the investment with the intention of recouping his or her capital investment and making profits when the business is fully operational and starts to show a profit.

Venture capitalists also provide needed funds to companies experiencing a financial crisis, with the aim of gaining a stake in the company through the acquisition of shares and positions on the management board. Such professionals specialize in analyzing the potential profitability of an ailing company, while determining the pros and cons of providing the capital. If it is determined that the company will eventually be profitable and provide a return on investment, the venture capitalists will provide the capital infusion needed to keep the company afloat.

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