Key Properties of Good Growth Capital

Growth Capital tends to be defined through various forms of capital such as equity, loan, or convertible.  Regardless of the type, it is important to start with an understanding of the properties of good growth capital, so you can make it work for you. Growth capital allows you to invest in the future, through funding various scale-up projects including acquisitions, product expansion and market expansion. The first key property of good growth capital is a customized structure.

The growth capital provider must design the capital to your need. It must be the right amount of capital and the proper term, providing enough time for the investment to mature. The structure should allow you to fund 100% of your growth need up front and allow for follow-on funding if needed. The term of the capital, meaning the date when it is due for repayment, should be geared to the specifics of the financial projection. Large scale business development often takes 2 to 3 years to yield results, so the repayment term should be set no earlier than 5 years. This type of timeframe provides valuable time and space for any contingency events that may arise from the plan.

Understanding Growth Capital

Good growth capital has transparency as to its price and its ultimate pay-off. There should be no mystery to how interest or any warrants are calculated. Any prepayment penalties should be made very clear in the contract. The take-out price of a warrant or shares should be clearly defined through a valuation formula in the purchase contract. The contract should state with precision the mechanics for effectuating the pay-off. Good growth capital also has balanced covenants and remedies, that should be proportionate to the level of risk.

Loan acceleration should not be triggered if the Company’s late with its financial report. Default level of interest should not be assessed for a minor financial covenant violation. The lender should ensure their downside is protected, but not at the expense of damaging the health of the company. Finally, good growth capital comes with clarity as to the post closing lending relationship. The Company has a right to know who will manage the loan and the approach that will be used, especially if there is a problem to work through.