What is Growth Capital?
Growth Capital is a term unfamiliar to many business owners. They know what a loan is and what investment is. Growth Capital sounds like something all businesses can benefit from. Unfortunately, it is a hard concept to learn and to put into action. There is no online growth capital site to visit to get a quick upload. When you ask your friends they look at you with a blank stare. Your lawyer or accountant might say, “isn’t that venture capital”. Growth Capital is like the proverbial Rodney Dangerfield of the finance world, getting no respect, yet offering great value.
Capital as Growth Accelerator
This article will teach you what growth capital is and how to get it. Growth Capital is money invested in a business to foster growth. It can be any form of capital including a loan or equity investment. It can be used for new business development, regional expansion, increased marketing or hiring new people. Growth Capital can even be used to acquire another company. There are no limits on what growth capital can be used for. The only requirement is that it earns an acceptable rate of return over time. When this happens, the company grows and becomes more valuable. Getting growth capital requires four steps. 1. Option identification; 2. Structuring; 3. Presentation; and, 4.Connection.
In the option identification stage, you must learn the market and identify what types of growth capital are available to your company. There are about 5 different stages in the life cycle of a company. Each stage is associated with different forms of growth capital. In addition, your company type and size factor into the growth capital equation. Companies in riskier industries usually can get asset based loans and equity investment as growth capital. Companies in more stable industries have access to a wider variety of forms of growth capital. The qualifying criteria including company size, industry type and company stage of development are all online and can be easily researched over the course of a few hours.
In the structuring stage, you need to figure out the amount of your financing requirement and the proper structure. Capital structuring involves allocating the money you are seeking to different valuation layers of the company. If you have a lot of loans, and you need a lot of growth capital, your capital need will likely be allocated to the equity layer. The less money you need relative to the value of your company, the more likely your growth capital will be in the form of a loan. When this happens, it’s a great outcome because you don’t get diluted by other investors.
Need to Look Good
In the presentation stage, you prepare your presentation materials which include an executive summary, financial statements and financial projection model. These files are consolidated in a confidential information memorandum which you use to contact different providers of growth capital. The materials should be professional and present a strategic vision of your company and its future growth.
The last step is generating prospective growth capital providers. This step is important and involves careful research and consulting with growth capital professionals. Targeting and finding the sweet spot in the market is extremely important. If your targeting is off, you’ll spin your wheels with little to show for your efforts.
So now you are armed and dangerous and ready to find growth capital on your own.
David Barnitt has worked in the finance industry for 25 years at both large banks, boutique lenders, and owns his own advisory firm, Attract Capital, LLC. His firm, founded to serve the needs of growing medium-sized companies, strives to make the capital raising process easy. He’s been involved in over 100 closed financings over the last 25 years. Connect with David on LinkedIn.