What is Growth Capital and How Does it Work?

In the world of investing, there are many different investment ventures that an individual or business can pursue. In pursuing these ventures, businesses aim to increase revenue over time. From small investments to large, the way that investment works and the risk involved with each type of choice can differ greatly. In theory, the process is relatively simple, but in practice, growth capital loans can get complicated. Usually, these types of business deals are as intricate and unique as the two target companies involved in the agreement. Let us cover what growth capital is, how it works, and how growth capital differs from other investment choices.

What is Growth Capital?

Growth capital, also called growth private equity and expansion capital, is the term used to describe investment capital that is given to a business or company in exchange for a share of the company’s future earnings. The loan is used to purchase assets that are essential to the company’s operations, such as equipment, office space, and inventory. Growth capital is provided to mature businesses that are in need of funds. In turn, the target companies use these funds to expand or restructure business operations and venture into new markets. While these mature companies can perform relatively well, the concept of growth capital is intended to accelerate the company’s growth. In addition, growth capital allows target companies to achieve time-sensitive business goals. When a growth capital investor chooses to invest in a company, the company receives the funds they need. Generally, the investor will offer goal-related advice in order to help protect their investment. To define it as simply as possible, growth capital is a step investors can take to help a company achieve a goal. It also greatly increases the value of the money they’ve invested by earning some of the company’s equity.

Pros and Cons of Growth Capital

There are a few things to consider when it comes to growth capital, which include the following:

The Advantages

Growth capital can help target companies get a business off the ground. It can also help a startup reach milestones that allow them to become larger and more profitable. Growth capital is also ideal for a startup that needs quick capital to expand. This can be helpful for companies in need of rapid growth and expansion. In the long run, a company that uses growth capital will be able to use its resources to make a greater impact on the market. In addition, these companies are able to secure funding for their growth needs in an expedient manner. This is ideal for a startup that has the capacity to meet a target in the short term. Growth capital can help these firms quickly achieve goals without creating financial strain on the company. This type of investment also allows business owners to maintain control of their startup while they grow and expand into new markets. In addition, growth capital helps businesses make strategic changes without running out of money. This makes it easy for businesses to raise money, as they do not have to find a new lender or go through a long application process. The lack of time spent finding funding can mean faster expansion and increased profit margins, which is important when trying to achieve large goals within a short period of time.

The Disadvantages

There are several disadvantages to growth capital. For one, growth capital can be expensive and can result in significant debt. The risks associated with growth capital can also be high. These risks include not having enough capital to cover expenses and the need to secure more funding in the future. The biggest disadvantage is that the funding is not guaranteed. Therefore, it is difficult for early-stage startups and other companies to raise enough money to reach their goals. For a startup that has not achieved a critical mass of customers, growth capital can be too risky. This is because growth capital investors may be unwilling to provide funding for businesses that are not sure of their success. In addition, there is no guarantee that the company will become profitable. Hence, investors are more likely to fund high-growth companies. Another disadvantage is that the risk associated with this type of funding can be higher than traditional bank loans. In addition, it can be harder for investors to recoup their investment funds. This can result in higher losses if the company fails to meet its goals or does not perform as expected.

How Does it Work?

Growth capital facilitates high-growth businesses to fund accelerated growth. This can be accomplished without the issue of equity dilution or losing ownership of the business. This type of growth capital works best for companies that are growing quickly. In the process of growth, these companies seek to reach specific milestones that increase their value. GC loans can differ from loan to loan. Usually, they depend on the circumstances of the individual businesses an investor is choosing. The contracts involved cover such circumstances as:

• loan size (usually between $2.6 million and $13.24 million)
• loan duration (usually 3-5 years), and repayment amount.

Monthly repayment agreements may include interest-free periods, followed by capital and interest payments. When it comes to deciding whether an investor is going to work with a certain company, the investor considers the company’s business model and management, and how it affects the company’s potential to grow. This is usually more important to investors than the company’s history and past performance. GC loans are ideal for many businesses because unlike loans from traditional banks, approval is generally faster. The approval also does not require personal liability clauses. However, GC loans are relatively high risk. Therefore, they tend to have higher interest rates than traditional business loans.

Success Example

Deliveroo, a food delivery service based in London was able to raise $275 million in funding that was led by Bridgepoint and Greenoaks Capital. The company received the financing to fund its geographic expansion. The company also introduced RooBox, a solution for off-site kitchen space restaurants could use for takeaway demands. Following the expansion, Deliveroo was able to set up offices in more than 200 cities across 12 different countries.

Growth Capital vs Venture Capital

Growth capital is a private equity investment into a mature company. Venture capital from investors, on the other hand, is a way that a startup and an early-stage company can gain the funds they need to grow. It is a useful financial instrument for startups that provides additional capital, and it is an investment vehicle for wealthy, individual investors, investment banks, and other financial institutions. These loans go to companies that already demonstrated success and promise. The funds received allows the venture-backed companies to expand further or undergo some sort of business transformation. In other words, venture capitalists provide early-stage businesses with capital in exchange for equity. They hope to be able to sell their equity stake in the future and turn a profit doing so. Corporate venture capital firms also make investments on behalf of large companies. Large companies who invest strategically in startups, especially those that operate within their core industry, often do so in order to gain competitive advantage and increase revenue. The venture capital industry involves venture capitalists or venture capital firms choosing to invest in small companies. Less mature companies tend to receive venture capital funding. The main difference between venture capital and growth capital is that a venture capital investor takes on more risky investment opportunities compared to GC investors. Though there are different stages of venture capital investments, they typically take place at a company’s beginning. This allows a chance of growth for venture businesses that are relatively new and have not shown the ability to earn consistent revenue. Meanwhile, growth capital investors prefer to provide private equity fund for companies who show a high growth potential.

Final Thoughts

Growth capital is an investment that provides funding to a company that needs help to expand. It is important for businesses to achieve their goals quickly and efficiently. Growth capital is an ideal way for these companies to receive funding and grow at a rapid pace. Growth capital loans can be beneficial for both companies involved. On one end, the company receiving the investment is able to quickly expand the company and accelerate its growth. In addition, the investor can earn equity in the company or collect interest on the loan in order to make the loan worth their time and money. If you’re still on the fence about whether or not you should seek out growth capital for your startup, you can consult a business attorney or a financial advisor in your area to learn more about the options that are available to you. This way, you can make a fully-developed business plan with much more informed company decisions.