Capital injection is an investment in cash, capital, or assets in a struggling business or start-up in exchange for equity. Governments and private sectors provide these payments to foster economic growth, but there is a risk that the funds will not be recovered. Venture capital firms and money managers are also recipients of capital injections.
A capital injection is an investment in the form of cash, capital, or assets in a business that might be starting up or that is having difficulties. It is provided in exchange for an equity stake in that company. A government can provide a capital injection to a shaky 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 start-ups.
When a government extends capital injections to an industry or to individual companies, it uses funds from taxes in the region to pay for the donations. This may be justified by the fact that a faltering industry, such as the financial sector or automobiles, presents a systemic risk to the economy should it fail. There is no promise that the funds will be returned to a government, but the decision to inject taxpayer capital into companies may be justified if it can foster economic growth or prevent an economic collapse.
In 2008 and 2009, the United States government committed $700 billion United States dollars (USD) in government money to financial institutions, insurance companies, and auto manufacturers that were vulnerable to collapse. Some of the companies that received this stimulus were expected to repay loans to the government, although not all recipients were deemed financially sound enough to do so. The main risk of a capital injection is the possibility that the funds will not be recovered and the profitability of the company will remain elusive.
In the private sector, venture capital firms can provide cash injections to companies that are promising, but are not yet generating enough revenue to grow the business. These companies get an equity stake in the business in exchange for the capital and thus share in any future profits or losses. Young tech entrepreneurs often start companies with a vision but little funding, and by receiving a capital injection, the company’s opportunities for profitability improve.
Money managers are also often on the recipient list for capital injections. A new investment manager intending to oversee client money in an investment vehicle, such as a hedge fund or mutual fund, may need to demonstrate success before investors commit capital to the fund. By getting a capital injection from a seed company, a wealthy individual, or from family and friends, an investment adviser can begin to manage money and track profits or losses. Eventually, she is able to market the fund to investors with a track record of fund performance, all due to the capital injection.
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