If your business is thriving, you may find yourself looking to take a big step forward and supercharge your growth. This may involve a large expansion, an acquisition, entering new markets, opening new locations, launching a second product line or some other big change that your current revenue stream cannot support.
You will most likely seek investments in the form of private equity to cover this surge in cost without having to sacrifice your normal profits. This is called growth capital, or growth equity, and it’s classified differently from most capital investments since it only applies to mature companies that are looking to further their growth.
Growth capital is a necessary part of doing business in the post-internet bubble era, as many companies are staying private much longer. This means that the funds necessary for continued success and growth are more often the responsibility of the entrepreneur.
While there are other methods that can deliver an influx of capital to a mature business—including controlled buyouts—growth capital is often considered a more desirable option for private companies because it allows them to maintain control and ownership of their organization.
While business owners usually give up a stake in their company in order to access growth capital, they are usually able to maintain a majority (or a large percentage) of their ownership. This allows the business owners the ability to share the financial risk inherent with growth and maintain ownership, all while gaining access to the capital they need in order to scale.
Sources of Growth Capital
Typically, private investors or interests supply growth capital, as they offer fewer repercussions for small businesses than other more structured sources. Here are some of the more common sources of growth capital, along with their major pros and cons.
Perfect for securing small amounts of money, normally $500,000 or less, angel investors will provide you with capital for a stake in your company.
- Pros: Additional business knowledge
- Cons: Seeks percentage of your company in exchange
Known for providing larger sums of money for investments, venture capitalists can be a one-stop investor for starting or growing businesses. However, it is important to note that most venture capitalists look to invest in companies that are just starting out and not ones that are already mature.
- Pros: Larger investments, typically work in a venture capitalist firm that offers multiple contacts
- Cons: Difficult to secure the interest of a venture capitalist if they have not heard of your business
Small Business Loans
One of the best sources for finding small business loans is the Small Business Administration website. Small business loans are subject to all of the same restrictions as regular loans, including applications, approvals and interest rates.
- Pros: Lower interest rates, one source for the amount of capital that is needed
- Cons: Hard to secure, lengthy application and approval process
Simply speaking, shareholders own shares of a company, thereby giving them the ability to vote on company matters. Shareholders are also eligible to receive dividends on the shares they own. In order to generate growth capital, businesses can look to increase their number of shareholders or take on shareholders if they don’t have any yet.
- Pros: Allows for partners to join the business
- Cons: Loss of autonomy for business owner, responsible to shareholders for performance
Created by Congress in 1980 as an amendment to the Investment Company Act of 1940, business development companies (BDCs) are publicly traded private equity companies that invest in small and medium-sized businesses in the United States.
- Pros: Allows anyone who can purchase shares in the BDC to invest in small companies; not just a function of very wealthy investors
- Cons: Government agency subject to more oversight and regulation
- Pros: Low overhead, multiple online resources
- Cons: Harder for smaller businesses to gain traction/exposure and funding
Managed by independent providers that supply businesses with a cash payment against future credit card sales.
- Pros: No collateral is required to secure funding
- Cons: Relies on business’ daily credit card transactions; not viable for non-retail-based businesses
Similar to a Merchant Cash Advance, Cash Flow Loans are not tied to credit card processing but to the overall profits of a business.
- Pros: Ongoing daily payback structure, not tied to credit card processing but general profits
- Cons: Harder to secure than MCA
Growing your business is vital to your survival, but it can be difficult to find the funds you need when the time comes to start expanding. Seeking growth capital from any of the above sources is one way to secure the funding you need to keep your business on an upward trajectory.