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What Is a Capital Injection?

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  • Written By: Geri Terzo
  • Edited By: C. Wilborn
  • Last Modified Date: 18 October 2014
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A capital injection is an investment in the form of cash, equity, or assets into a company that might be just starting out or that is struggling. It is provided in exchange for an equity stake in that company. A government can provide a capital injection to a floundering industry in a nation's financial markets for the betterment of the region's economy. The private sector also extends these payments, and there are some companies that are designed to provide seed investments or capital injections into upstart firms.

When a government extends capital injections into an industry or to individual companies, it uses tax funds in the region to pay for the handouts. This may be justified by the fact that a floundering industry, such as the financial sector or automobiles, poses a systemic risk to the economy should it fail. There is no promise that funds will be returned to a government, but the decision to inject taxpayers' capital into companies may be justified if it can foster economic growth or prevent an economic collapse.

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In 2008 and 2009, the US government committed $700 billion US Dollars (USD) in government money to financial institutions, insurance companies, and automakers that were vulnerable to collapse. Some of the firms that received this stimulus were expected to repay loans to the government, although not all of the recipients were considered financially sound enough to do so. The primary risk of a capital injection is a possibility that no funds will be recouped and profitability of the company will remain elusive.

In the private sector, venture capital firms may provide cash injections into companies that show promise, but are not yet generating sufficient revenues to grow the business. These firms obtain an equity stake in the business in exchange for the capital, and therefore share in future profits or losses. Young technology entrepreneurs often begin companies with a vision but little funding, and by receiving a capital injection, the company's chances for obtaining profitability improve.

Money managers are also often on the recipient list for capital injections. A new investment manager with intentions to oversee clients' money in an investment vehicle, such as a hedge fund or mutual fund, may need to prove himself successful before investors will allocate capital to the fund. By obtaining a capital injection from a seeding firm, a wealthy individual, or from family and friends, an investment adviser can begin managing money and track gains or losses. Eventually, he can market the fund to investors with a history of fund performance, all because of the capital injection.

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Perdido
Post 2

I never really understood why the government thinks that putting billions of dollars into failing businesses will somehow help them succeed, but after reading this article, I understand that they do it to protect the whole economy. I do wonder, though, how long the money can last in this situation.

Are companies that receive federal capital injections generally able to sustain their businesses, or do they often fail once more when the government money runs out? I hope they all do well, but I do have my doubts.

cloudel
Post 1

My friend was able to open up his computer repair business because of a capital injection from a fellow church member. My friend had fixed his computer when he thought it was beyond repair, so this man had seen firsthand what he could do.

He also knew that my friend had recently completed his computer science degree. The man was retired and had more money than he knew what to do with, so he offered to help my friend get his business started in return for a small stake in the company. His business has done well, so I’m sure the man is glad that he invested at the upstart.

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