What is Growth Capital?
Growth capital is money that has been lent to a company with the intention of being repaid through a future earnings stream. Unlike other forms of debt, it’s not secured by collateral, meaning the borrower shouldn’t be expected to repay it at the end of their term.
Traditional methods for raising growth capital include traditional equity financing and more recently crowdfunding and corporate venture philanthropy. Growth capital according to Fintalent’s Growth Capital consultants can also be made available as separate grants or loans from private individuals, foundations and institutional funds including banks, pension plans or investors who seek long-term returns without taking on significant risk themselves.
Although growth capital may offer potential tax benefits over other forms of debt (e.g. interest payments may be tax deductible), it may also pose high risks to the lender, who does not have a secure claim on the company’s assets if the business fails. If a business has a good chance of failure or negative cash flow and doesn’t have access to much in the way of collateral, venture capitalists are typically unlikely to lend capital to that company.
A perfectly legitimate company is borrowing growth capital with no intention of ever repaying it; they are shooting for success and growth. They are counting on their ability to become successful enough as an organization (in revenue and market share) that others will want to invest in them rather than demanding repayment from those who lent money to them before.
The opposite of growth capital is venture capital which comes with a high risk to the investor. Venture capital re-investment can be achieved by issuing traditional debt (i.e. secured loans).
If a company is not solvent, and/or the financial metrics show they have “too much debt”, then they will not be taken seriously by investors who must make a profit from their investments. The key metric for success in growth capital is market share. The first to achieve a large market share gains a position that other potential investors will want. This is why companies such as Google, Facebook and Amazon are able to raise growth capital at such high valuations.
Companies borrow growth capital primarily for two reasons:
1) So they can reach revenues (i.e. become profitable) faster than would otherwise be possible;
2) So they can attract new customers faster than would otherwise be possible.
The interests of stakeholders (employees, board members and the public) may differ from those of shareholders in a typical privately held company. For example, these stakeholders may be concerned with the company’s long term prospects in the market. Growth capital is intended to help a company achieve these objectives.
Growth capital can also be made available as individual grants or loans from private individuals, foundations and institutional funds such as banks, pension plans or investors who seek long-term returns without taking on significant risk themselves. In some cases this is accomplished via crowd funding. With crowd funding and other forms of growth capital, debt levels remain manageable while new infrastructure can be built that will enable a company to eventually become profitable through organic growth in their own business model or by acquisition.
The sources of growth capital differ in their risk profile and tax implications. Traditional methods for raising growth capital include traditional equity financing and more recently crowdfunding. Corporate venture philanthropy is becoming increasingly important as an alternative to debt financing for small businesses.
Growth capital can also be made available as separate grants or loans from private individuals, foundations and institutional funds including banks, pension plans or investors who seek long-term returns without taking on significant risk themselves.
Grants are used to cover a portion of the costs involved with the improvement or creation of a new infrastructure (i.e. human resources, information systems, physical space etc.) that will enable a company to eventually become profitable through organic growth in their own business model or acquisition.
Growth capital can be used for the hiring of new employees or for other business development purposes. It can also be used to purchase physical real estate (e.g. lease space) in which a company’s business has been established.
Growth capital is attractive to companies that have already demonstrated growth and revenue, but are either unable or unwilling to obtain traditional debt financing from banks or investors.
Growth capital has become a popular form of financing focused on the creation and building of new businesses in a period of economic crisis unlike any other in recent history. Growth capital is more often found in technology-based fields than in any other industry sector aside from financial services, where technology plays an instrumental role as well (e.g. online lending).