What Is a Capital Increase?

C. Daw
C. Daw
Man climbing a rope
Man climbing a rope

A capital increase is an increase in the capital of a business or company. The capital, or financial capital as it is technically called, is the money invested into a company to allow it to manufacture its goods or products, to provide its services, or to do whatever is needed to make the business operational and allow it to make profit. This capital may be provided by investors, lenders and/or the owners of the company themselves.

Most people have an idea that capital is the finances needed to start or build a company from scratch, but this widespread notion is not completely correct. Another kind of capital is what is called real capital or economic capital. This refers to physical things purchased using financial capital which is used in the day-to-day operations of the company. Some examples of real capital are machinery, equipment, tools, vehicles, and buildings.

A capital increase can be an increase in either financial or real capital, or in both. More often, it is an increase in the finances or monetary wealth of the business. In reality, financial capital is easily convertible to real capital, so loosely speaking, it does not matter much to distinguish which type of capital the increase is seen in. A capital increase can take place when investors put in greater investments, or when the owners themselves inject more money into their business. It can also take place as a result of the issuance of new shares. Additionally, it can happen when capital stock increases in par value.

A company's financial standing is improved by a capital increase. With greater capital, the company can increase its production, marketing, and sales. It can expand on its ongoing operations or even venture into new fields that feasibility studies indicate may be lucrative for the company. With a capital increase, there is greater freedom to increase inventory, buy more machinery, upgrade into more high-tech equipment, and so on.

To use economics terminology, a capital increase may be used to augment the fixed capital of the company as well as its working capital. The fixed capital is that used in buying assets that will be permanently in the possession of the company. The working capital is that used to sustain operations, pay expenses, and buy stock and credit.

Any and all monies coming into the company should be used judiciously, and this applies as well to capital increases. It must be remembered that an increase in capital may be due to loans provided by banks or other lending institutions; this denotes an increase in borrowed capital. These loans eventually have to be paid off according to the loan contract.

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