Why Companies Raise more Growth Capital

Growth creates the need to scale all resources in a company including people, space, systems and capital. Often the need to scale people and operations is more apparent to an explosively growing company, than the need to scale finance. Yet growth capital is the force that powers the upward trend, and also provides a valuable liquidity buffer in times of trouble. Smart companies with strong valuations raise more growth capital than needed during the good times, to make sure they can withstand any potential negative situation down the road.

It could be recession, industry downturn or organizational restructure. Whatever the adverse event is, it will take strategic investment in the business to get things back on track. Lenders like seemingly sure bets, companies with a sense of inevitability to their scale-up destiny with accelerating revenue and expanding margins. The best time to raise growth capital is when it’s widely available.

When times are good, lenders all want in and will actually give you more money than needed. Rather than cut back the round, it’s advisable to take the larger amount, providing the extra cost is manageable. That extra capital cushion is your growth capital liquidity buffer,which gives your liquidity strength, strategic flexibility and long-term staying power. This buffer provides tremendous optionality to your growth plan. It allows you to do things that most firms can’t do when things go south. Conversely, this extra buffer allows you to pursue more differentiated growth strategies such as a simultaneous organic and acquisition play, which can bring large value to your company.

Advantages of having a Growth Capital Liquidity Buffer

Whether investing into a down market or an upmarket, having a growth capital liquidity buffer is a smart move. Here at the Attract Capital 4 Wins from having a growth capital liquidity buffer:

It De-risks the Growth Journey – companies that can complete their growth journey are worth more than companies that do not finish. The ultimate goal is to be able to achieve your growth goal and get to the finish line, in shape for a strong exit. Extra capital gives you a higher probability of getting to the finish line.
Ensures you can survive downturns – the great recession taught us all that things can change quickly for the worse, and that changes can be multidimensional and deep rooted. Most companies not only took large revenue hits but also had to deal with a permanent structural change to their working capital cycles. Having extra capital mitigates this effect and allows you to sustain your balance sheet.
Provides Big Strike Ability – most companies lack the ability to do great deals that come across the transom, solely because they can’t mobilize capital quickly enough. When you have a growth capital liquidity buffer, you have the big strike ability which can transform your company and your valuation.
Keeps your lender happy – most lenders like borrowers who hold more cash than they really need. Lenders live in fear their feckless borrowers will run out of money. When you are conservatively capitalized with a growth capital liquidity buffer, they worry less and support you more.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.