When an individual decides to start an entity, he or she will have to bring in funds, and these funds introduced are referred to as capital. More so, as the business continues to operate, the owners might decide to bring in more funds, which is referred to as capital injection. In this article, we explained capital injection and why investors might decide to inject more into a business.
Capital injection defined
Capital injection is the money business owners and investors bring into a corporation. It is additional funding that may be introduced for several reasons. The manner of the funding will determine the double-entry postings for the capital injection.
This fund can come in various forms. Generally, it can be either equity or prior charge capital or both. Prior form capitals (PFC) are long-term borrowings and preference shares. They usually come with a fixed charge which gives it the name above. Equity capital is funds from ordinary shareholders. And each ordinary share represents a portion of ownership in a business.
There are different reasons for injecting more capital into an organization. However, the main reason for doing so is to support continued operation. This term is more common with financial institutions than any other industry in Nigeria.
For example, banks in Nigeria, from time to time, might be instructed by the central bank to introduce more capital when their capital is below the minimum requirement. In other cases, the apex bank may increase the minimum capital requirement and expect the bank owners to inject more funds.
Reasons why capital injection is necessary in businesses
For business expansion
More capital is required if a company plans to enter other markets. Therefore, the directors may seek funding from investors, including venture capitalists (if it is a startup). For startups, especially in the fintech sub-sector, we have heard of funding rounds series with the primary motive of reaching several milestones. These can include growing from the incubation stage to making the product or services available to the market, becoming a unicorn, or growing into a global startup.
Help ailing companies
Another reason why companies may require additional funding is to prevent them from being liquidated. Some companies might be ailing but have growth potential. As a result, investors can inject more capital to provide the liquidity needed to keep it financially stable.
Part of the regulatory requirement
Financial institutions are highly regulated. Their regulatory body may require the owners to inject more capital for one or more reasons. In Nigeria recently, the Central Bank has had all banks recapitalized to a certain amount in its one trillion economy ambition.
As a result, companies with high reserves give new shares to their existing shareholders through rights issues. Others inject more capital by issuing new shares. Also, a bank's capital can be eroded by accumulated losses. The apex bank will instruct the bank’s owners to inject more capital to maintain the minimum capital requirement.
For continuous operations
Lack of cash can affect business operations. Employees may fail to meet customers' orders due to unavailable materials to complete the order. On the other hand, there is no cash to buy the materials required. As the company fails to meet the demands of customers, it loses revenue to competitors. To avoid this, capital injection is the way out.