The ABC’s of Growth Capital – its Role and Value to a Growth Company

Posted on: September 3rd, 2016

Growth capital refers to those funds used by a company to expand operations, launch new products and markets, or carry out an acquisition. Many companies are able to fund small scale growth but large scale growth requires outside funding in the form of growth capital.

Growth Capital can be either be in the form of a loan or an equity instrument. Often some customized package of both a loan and equity instrument is the best growth capital solution.

Companies should be established and producing a consistent level of profitability before attempting to raise growth capital. Growth capital providers such as mezzanine lenders and equity investors see their funding as the way to unleash the growth potential of a high growth company.

Their funding is the fuel to scale the company, through expanding capacity and replicating the business model. Middle market companies which acquire growth capital are able to produce economies of scale which also improves their cost efficiency.

Overall, growth capital is extremely beneficial for a company. A business needs to keep altering its strategy over time, so that it can boost its value and remain competitive in an ever-changing world.

This is usually done by developing new products and/or services and by expanding and exploring new markets. Growth capital will be able to aid a company to do just that.

By securing growth capital, a company can take a number of actions aimed at increasing its size. It can invest more in sales and marketing.

This will help them in acquiring new clients and in retaining existing customers. It can drive more innovation through investing more in product development.

It can increase its level of internal digitization to become more efficient and systematic. Growth capital also enables a company to conduct mergers and acquisitions.

Known as acquisition financing, it allows a company to merge with another or acquire it. Mergers and acquisitions are vital to the growth of a company and it provides many advantages.

Often, acquisitions offer a company a quicker and safer route to scaling up than pursuing a path of organic growth.With acquisitions, a middle market company can increase their footprint and realize a network effect.

This allows them to launch their existing products in the market and generate more sales through the customer base.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.