Types of growth capital

Navigating the funding landscape is always tricky, not least because of the variety of options available to businesses.

A key distinction is whether the funds raised are intended for growth (growth capital) or for day-to-day operations (working capital). But even within the realm of growth capital, there are numerous borrowing options aimed at helping businesses expand.

This article will explore some of the different types of growth capital and identify which businesses they are best suited for.

What is growth capital?

Most broadly speaking, growth capital refers to any type of funding that has the primary aim of supporting a business’ growth.

From scaling operations to entering new markets and/or starting projects that require significant investment, most businesses will raise growth capital to underpin these activities.

Growth capital can be obtained through both equity and debt financing, each offering unique features and benefits that will differ depending on the type of business and where it is in its lifecycle.

You can find out more in our Ultimate Guide to Growth Capital for SMEs and Scale-ups.

Types of growth capital

There are many different types of growth capital, but an easy place to start is by distinguishing between growth capital raised via equity and growth capital raised via debt.

Growth capital via equity

Raising growth capital via equity involves securing funds by selling a portion of the business to an investor / investors.

This approach is particularly beneficial for earlier-stage companies that may not yet have the steady cash flow required to support regular debt repayments. By selling equity, these businesses can access the capital needed to support their growth plans, without the immediate financial burden of repaying a loan.

Additionally, equity investors often bring valuable expertise, industry connections and strategic guidance, which can be instrumental in navigating the challenges of scaling a young company. This support can help early-stage businesses accelerate their growth trajectory and achieve their long-term objectives.

This type of capital includes:

1. Venture capital
   Venture capital (VC) is a type of equity funding where investors provide capital in exchange for a stake in the business. VC investors not only provide funds but also bring expertise, mentorship and networking opportunities, which can be invaluable for younger companies looking to scale quickly.
2. Private Equity
   Private equity (PE) involves investment from private equity firms that acquire significant stakes in more established businesses. These firms typically aim to improve the company’s profitability and value over a period of several years before exiting the investment. Private equity can be an excellent option for companies looking to make substantial changes, such as operational improvements or strategic acquisitions.

Growth capital via debt

Raising growth capital via debt involves borrowing funds that must be repaid over time, with interest – much like a conventional loan.

This option enables businesses to raise the necessary capital to fuel their growth, but without diluting ownership. By opting for debt financing, companies can maintain full control over their operations and decision-making processes, particularly if they work with a lender that offers covenant-lite terms.

This form of growth capital is better suited to more established businesses that have predictable cash flows and robust revenue streams, as they can comfortably manage the repayment schedule.

This type of capital includes:

1. Term loans
   Term loans work as you would expect – a business borrows a lump sum (usually calculated as a multiple of revenue) and repays the sum, plus interest, over a fixed term. Term loans can be used for various purposes, including expanding operations, purchasing equipment, or refinancing existing debt and depending on the lender, can be tranched to align with the various phases of a business’ long term growth plan. As such, these loans are most suitable for companies that have a clear plan for how they will use the funds and a high level of confidence that these plans will result in growth – enabling the business to comfortably service the debt.
2. Venture debt
   Venture debt is a type of debt financing aimed at businesses that are still growing rapidly, but are perhaps slightly less established. In these instances, the debt may accompany some existing equity financing, or will be structured as a conventional term loan plus an equity kicker. Like a term loan, venture debt provides another layer of funding with minimal additional equity dilution. Venture debt is often used to extend the runway between equity rounds, finance capital expenses, or support specific growth initiatives.

What next? How to secure growth capital

Deciding the right type of growth capital for your business is a crucial first step.

Both debt and equity have different advantages and drawbacks depending on the stage of your growth journey; understanding these differences and aligning them to your business goals will help to establish which is likely to be a better fit. You can find more information about the next steps of the process in our Ultimate Guide.

At Growth Lending, we bridge the gap between debt and equity, offering tailored solutions that support the unique needs of growing SMEs in the UK. To find out more, reach out to a member of our expert lending team who will be more than happy to help.