Growth Capital – Ballast for Middle Market Companies

Posted on: December 7th, 2020

growth capital

Ballast is a material used to provide stability to a structure. On a boat, ballast is used to provide stability and resist lateral forces. It does this by compensating for weight loss, which leads to greater vessel maneuverability. Without this component, ships have more difficulty sailing and are subject to risk. All middle market companies also need ballast in their operations to ensure equilibrium. As markets exert pressure, companies need the ability to resist these forces and retain the ability to scale. Growth Capital is a key form of ballast that provides this for middle market companies. It is a form of debt capital that can be invested in your operation to stabilize it or to scale it.

Maximizing Your Growth Capital

Growth capital can be directed at strengthening an existing area that needs improvement due to employee turnover, product issues, or competitive forces. It can also be used to invest in a new product line or method of distribution that will further expand the business model. Companies often use their existing financial resources to fund these types of expenditures, but this often limits the amount of capital available to invest. The greater the growth capital ballast available, the more impactful the stabilization and scaling velocity will be. Here are Attract Capital 4 tips for maximizing your growth capital ballast:

1. Conduct Bottoms up Growth Analysis– generating ROI on strategic growth requires quantifying the total lifecycle costs and timing factors. Develop bottoms up assumptions to map this out to ensure you are using the best possible factors for forecasting.

2. Maintain your Working Capital – companies tend to eat their seed corn and consume their working capital to invest in new strategic growth. Do not borrow from Peter to pay Paul. Make sure you are funding new business through new growth capital, so you do not put pressure on the base business.

3. Raise the Right Amount of Growth Capital – do not be tempted into shortchanging the quantum of growth capital you need. Your capital raise should be at least 2 years’ worth of growth expenditures. If you cut it too short, you may not be able to fund the project in its entirety leading to losses and lack of scaling.

4. Understand the Valuation Implications – fast growth, dynamic companies are worth a lot more than slow growth businesses. Growth capital can put you on a higher trajectory and help you get a bigger exit value when you are ready to sell. The cost of growth capital should not be just be measured against the cost of a bank loan. It should be measured against the opportunity cost of not investing and achieving a higher exit value.

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.