Growth capital is funds set aside to help a business grow or expand its current operation, often sought through venture capital or issuing preferred shares. It allows for expansion without putting stress on other revenue streams and can be managed with lower interest rates than commercial loans.
Sometimes referred to as growth capital or expansion capital, growth capital is funds set aside to help a business grow or expand its current operation in some way. These funds can be used to build new facilities, move into new consumer markets, or as financing to help restructure a business in a way that increases opportunities to become more prominent in the marketplace. Raising growth capital often involves choosing to seek venture capital from investors or issuing preferred shares that help create a pool of funds that are in turn used to fund a specific growth project.
The idea behind capital growth is to create a resource that goes above and beyond the income needed to manage the expenses of the current business operation. This means designing a strategy that generates revenue that can easily be reserved for the expansion project. For example, a retailer wanting to open two new stores might look to generate funds by issuing additional stock or even creating a bond issue. Investors have the opportunity to generate some form of return once the new stores are up and running and start generating revenue that helps increase the bottom line of the business. In the case of issuing bonds, a portion of the proceeds generated in these stores can be used to pay off the bonds at any interest rate stated in the terms of the bond, without the need to touch any other assets held by the company.
The benefits of using growth capital as a means of managing the expenses associated with a growth project often center around the ability to complete the project without putting undue stress on other revenue streams. This means the company can continue to support other operations at the same level as it positions itself to expand. When carefully structured, the effort may even allow time for expansion to take place and begin to generate income that helps compensate investors, making the expansion self-sustaining.
While it is possible to use corporate loans as a means of financing a growth project, using venture capital or issuing bonds to generate the necessary growth capital is often a preferable solution. This often gives the company more flexibility in paying back investors and can sometimes even be managed with an interest structure below the rates associated with available commercial loans. As a way to manage the cost of expansion, capital growth is often the most practical approach to the effort.
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