What is Capital Inflow?

Capital inflow is a business term used to describe an influx of usable funds that comes from a source or sources outside the company. These monies may be in the form of investments, gifts or loans. They are generally used to fund major purchases, such as machinery, buildings, land or equipment.

Loans are one of the most common forms of capital inflow. Businesses large and small often take out loans from banks, finance companies and private lenders to fund capital investments or expansions. Loans must be repaid, usually over a set period of time, and usually with interest.

Investors are also a common source of new capital. Private business owners often take on new partners or investors in order to raise needed funds. Alternatively, a business owner may opt to sell stocks, either privately or publicly. Public companies may opt to sell additional stocks. In any case, the new investor or investors will receive a share of the company's profits and may have a say in the company's decision-making processes.

Gifts and grants are usually associated with not-for-profit companies, such as schools and charities. A large alumni donation earmarked for a new stadium and a grant earmarked for purchase of additional land are examples of capital influx. Unlike other sources of capital, grants and gifts do not have to be repaid and do not usually convey a financial interest to the giving or granting party.

The funds obtained through capital inflow are usually used to purchase tangible assets such as real estate or machinery. In some cases, the terms of the loan, gift, grant or investor agreement may stipulate how the capital is used or, at least, that it be used to acquire real property. In other cases, the capital may be used to purchase semi-intangibles, such as technology or labor.

Related terms that often cause confusion include revenue and income. Both of these terms, however, refer to monies that are generated by the business. These funds may come from sales of the company's products or services or through the sale of company-owned assets. In contrast, capital inflow comes from sources outside and independent of the business.

The term "capital inflow" may also be used when discussing national economies. In this case, it specifically refers to monies received from foreign countries. In most cases, this capital comes from developed countries and is invested in emerging or "third-world" countries. The intent can range from increasing agricultural production to assisting the transition from agricultural to industrial production.