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.

As new acquisition financing credit funds pivot to non-private equity sponsored deals, many lack experience with the asset class. Non-sponsored deals such as direct loans to companies or loans to independent sponsors making acquisitions are quite different from private equity backed deals and require a different thought process and engagement style from the lender.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.