Overview of Growth Capital

Growth capital is a second batch of funding a company may receive in order to expand operations, institute a major chance or otherwise alter its direction. Companies seeking growth capital are typically mature, profitable organizations with low amounts of existing debt. Unlike companies seeking venture capital, these organizations offer immediate returns to investors who front the growth capital required. Of course, the payout on a growth capital investment relies on the success of the company in the immediate future.

When to Seek Growth Capital

A company may seek growth capital in a number of scenarios where they need an immediate source of private funding. One common reason to seek an investor is to buy another business, also known as a merger or acquisition. When a company is presented with the opportunity for a buyout, it may need funding immediately. In this case, private funding from an investor can be a much faster way to come up with the cash needed when compared to taking out a loan or issuing more stock. These same benefits apply when a company is considering opening a new office, expanding overseas or taking on a venture in a new area.

Sources of Growth Capital

The most common source of growth capital is a private minority investor. This investor is seeking equity in the company rather than interest on the funds he or she gives to the organization. It is possible to secure growth capital from investment groups such as hedge funds or private equity groups. It is also possible to use an angel investor, such as a friend or relative, for the funding.

Benefits of Growth Capital

The investor benefits from adding growth capital to a business by immediately obtaining equity in the business. If the investor were just to extend a loan, the profit they could earn would be limited to the interest charged on the debt. With equity, there is no cap to what the investor can earn on the investment. On the flip side, the company benefits because it takes on little to no risk when accepting a new investor. If the initiative fails, the company is not obligated to repay the debt. This would not be true if the company sought a loan rather than an investment. In that case, it would still need to repay the debt, regardless of whether or not it had new revenue to do so.

Downsides of Growth Capital

On the reverse side of these benefits, each party does make some concession. An investor is assuming nearly all the risk when putting up growth capital. As mentioned previously, the investor will see no return if the new venture fails. For the company itself, the largest downside is taking on a minority partner. While some investors will have little say in the day-to-day operations of the business, some will want a seat on the board, direction over a project or great influence in the decisions of the company. Many small businesses and corporations are not interested in making these types of concessions.

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