Posted on: November 25th, 2021
Growth capital financing is a valuable form of capital with a bit of a blurry image. This stems from the many different types of financing that can be classified as growth capital. Most lenders do not use this term, Growth Capital, in describing their loans, even when it is in fact, growth capital, but opt for more fanciful, legalistic names. The person in need of capital cares little about its fanciful technical name, they just need money to move the ball downfield.
The key in raising growth capital is realistically assessing the speed and the resources needed for the downfield movement, and aligning those parameters with the various growth structures available. By pinpointing what your business needs to get the ball in the end zone, and building these elements into a growth capital loan structure, you are well positioned to score. Expertise on the debt structure frameworks is essential to calibrating this.
Too many people give short shrift to learning the fundamental differences of these structures, which often leads to fitting a round peg in a square whole. Without understanding the concept of each different loan structure, the lender’s underlying philosophy and relationship dynamics, you will not make the best choice. Optimal growth capital financing is when the capital has a lower price and a longer term than the market rate for this type of credit risk.
Acquisition growth capital usually requires a large amount of equity investment, which is usually priced from 15% to 22%. If you can find a mezzanine lender to lend all of the growth capital needed for the acquisition, their rate is usually 12% to 14%. When you can fund your growth with 100% debt as opposed to 70% debt and 30% equity, it is a huge win tantamount to a growth capital touchdown.
Similarly, if you can engineer a 5-year term with no principal payments throughout, as opposed to a senior loan with a 5-year term and 20% principal payments per year, that is a huge win. The borrower is able to invest broadly in growth and matriculate the ball downfield, without being hounded by the defensive pressure of loan payments. With this extra bit of daylight, the business can scale more easily, get in the endzone, and repay the entire loan quite easily.