What is growth credit and how can it support my business?
Securing external investment is paramount to success for the majority of businesses. Funding enables firms to grow more quickly and with more resilience to changing market conditions than if they were to attempt growth organically.
And the good news is that there are more options than ever before when it comes to fuelling business growth. The not so good news is that this breadth of choice makes it very difficult for business leaders to ascertain which is the best option for them.
Here, we cover some of the key characteristics of growth credit, how it benefits growing businesses and the types of firms it is best-suited to, to help demystify the funding landscape and help you navigate it more easily.
What is growth credit?
Growth credit is a type of growth capital, which, as the name suggests, is designed to support businesses’ growth.
Unlike conventional bank loans, growth credit lenders usually focus on a company’s potential for future growth, rather than relying solely on past performance or tangible collateral.
This forward-looking approach makes growth credit particularly appealing to businesses in disruptive and rapidly-scaling sectors, such as technology, IT and professional services.
How does growth credit work?
Growth credit works similarly to a conventional bank loan, in that a business borrows an agreed sum over a specified period of time, with regular repayments of the initial sum, plus interest.
Some lenders will also support tranching, where the sum is drawn down in separate chunks during the term of the loan, each with specific purposes in mind.
What can growth credit be used for?
One of the main benefits of securing growth credit, particularly if you choose to work with the right lender, is that the funds can be used for a wide variety of growth-orientated initiatives.
From scaling the sales and marketing function, to investing in cutting-edge research and development, to facilitating strategic acquisitions to expand market share – growth credit is designed to be used flexibly to support a business’ growth.
Growth credit can also provide working capital breathing room, by smoothing out the cash flow fluctuations that are common during phases of rapid growth. This enables businesses to pursue ambitious growth plans without compromising on their operational needs.
Is growth credit a form of growth capital?
Growth capital generally refers to any type of funding that has been secured, primarily, with growth in mind. It encompasses a wide variety of different funding structures and growth credit is just one of the options available to businesses.
The term “growth credit” is sometimes used interchangeably with “term loan” and “venture debt” – also types of growth capital. But where a term loan refers more to the structure of the investment, growth credit and venture debt offer insight into the type of company that lenders are aiming to support. Venture debt and growth credit lenders are usually looking to work specifically with high-growth firms and so their approach to the lending process will be better-suited to a rapidly scaling business than that of a non-specialist lender.
At Growth Lending, our growth credit is structured in the form of a term loan, but the principle is the same: offering flexible funding to help accelerate the growth of ambitious businesses.
Growth credit versus traditional bank loans
As above, the main distinction between growth lenders and traditional banks is their approach to the lending process.
While banks place significant emphasis on historical financial performance, growth credit providers are more interested in a business’ potential and in particular, its capacity to generate predictable revenue streams. This is because growth lenders are more specialised – they have knowledge and experience specific to fast-growing businesses and therefore understand that when growth has been fast and significant, robust forecasting can often paint a more useful picture of a business’ growth trajectory than its current track record.
Growth credit is also more likely to present as a hybrid solution. In these instances, the growth credit provider might work alongside an equity investor, enabling businesses to access a larger amount of cash without excessive dilution of ownership.
This adaptability to a company’s specific financial position and growth trajectory makes growth credit a valuable tool for businesses seeking tailored financing solutions beyond the confines of traditional lending models.
Growth credit versus equity capital
While both growth credit and equity capital can fuel business expansion, they differ in their terms and implications for ownership.
Equity capital, often provided by private equity funds or venture capitalists, involves relinquishing a portion of company ownership in exchange for an agreed sum. By comparison, growth credit enables businesses to access capital without diluting existing equity stakes. This is particularly attractive to founders who want to retain control over their businesses while simultaneously securing the funding needed for expansion.
It’s important to note however, that growth credit requires a regular repayment schedule, where equity capital does not. This makes it better suited to businesses at scale-up, rather than start-up phase, because regular loan repayments will not have a significant impact on profitability and, for these slightly more established firms, further equity dilution could be the more costly option long-term.
What type of business would benefit from growth credit?
1. Rapidly scaling businesses
Growth credit is well-suited to companies that exhibit strong growth potential but – because they have scaled very quickly – may not have the lengthy operating history preferred by traditional lenders.
These businesses are characterised by their ambitious expansion plans and require flexible funding so they can seize market opportunities and manoeuvre competitors, while also maintaining focus on their core business objectives. Growth credit provides the agility needed to do both.
2. Tech-enabled businesses
Tech companies, by their very nature, are often driven by innovation and rapid scalability, requiring access to capital that can keep pace with their ambitious growth and R&D demands.
Growth credit is a non-dilutive funding solution that provides technology-driven businesses with the resources they need for product development, market expansion or strategic acquisitions, while also allowing them to retain control of their strategic direction.
The types of lenders that offer growth credit are also part of the reason that growth credit is a good option for tech-enabled firms. Such businesses usually lack any tangible assets, instead needing to leverage IP, or their recurring revenue to secure capital. Conventional lenders do not have the sector expertise required to lend confidently in these instances, whereas growth credit providers are both experienced and knowledgeable when it comes to structuring deals for technology-led businesses.
3. Businesses with buy-and-build or acquisitive strategies
Companies pursuing an acquisitive approach to growth often require significant capital to execute these plans, integrate the new business(es) and realise the synergies and associated upside.
The flexible nature of growth credit, which can be structured in a way that considers the profiles of the acquisition targets, as well as the parent company, makes it a great option for businesses intending to grow through strategic acquisitions.
Growth Lending offers additional benefit to businesses with acquisitions in mind with the option to tranche facilities. This means that a tranche of the total loan can be drawn down to align with the acquisition timeline, a good option where M&A makes up some, but not the entirety, of a business’ growth strategy.
How to secure growth credit
Growth credit lenders want to thoroughly understand your business, its funding requirements and how it will use the cash to support its plans for growth. You will therefore need a clearly articulated business plan and a compelling growth strategy that is grounded in realistic financial assumptions. Preparation of a robust financial model and consideration of how your business would perform in a downside scenario are essential and will play a key role in the lender’s due diligence process.
Getting these things ready before you begin the fundraising process will save a lot of time later on and will show lenders that you have really thought about how funding will play a role in your growth journey.
Key criteria for eligibility
While specific eligibility criteria will vary between lenders, most lenders want to see a demonstrable track record of revenue growth, strong gross margins and a compelling value proposition within their respective markets.
Some lenders will still be interested in pre-profit businesses, but you must be able to clearly demonstrate how you will get there.
As above, the ability to articulate a clear and achievable growth strategy, supported by robust financial projections, is paramount in demonstrating the viability and attractiveness of your business to potential lenders.
Finding a lender
While the alternative lending market is expanding rapidly and there are more options for businesses than ever before, it can make identifying the best choice for your business tricky.
Seeking recommendations from trusted advisors is a good place to start, as they will have knowledge of the products available, the eligibility required to secure the facility and key contacts within particular lenders to facilitate introductions.
Doing your own research is no bad thing, however. Even professional advisors are guided by their own knowledge and experience and no single individual will be well-versed in every option available. Engaging with multiple lenders, comparing terms and conditions and carefully evaluating their understanding of your business and sector, alongside professional advice, are sensible steps for securing the optimal growth credit product for your business.
What next?
If growth credit sounds like it could be a good option for your business, the next step is to get in touch with a lending expert. Our team is on hand and happy to have a conversation about your business, its growth plans and how we might be able to support you.
