Growth capital is funding used to help businesses expand, often through venture capital or issuing shares of preferred stock. It allows companies to generate revenue for expansion without placing undue stress on other revenue streams. Using growth capital is often a preferable solution to business loans.
Sometimes referred to as growth capital or expansion capital, growth capital is funds intended to help businesses grow or expand their 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 to increase its chances of becoming more prominent in the market. Raising growth capital often involves choosing to seek venture capital from investors or choosing to issue shares of preferred stock which helps create a pool of funds which is in turn used to finance a specific growth project.
The idea behind growth capital is to create an asset that is above and beyond the revenue needed to handle the expenses of your current business operation. This means designing a strategy that generates revenue that can easily be set aside for the expansion project. For example, a retailer looking to open two new stores may seek to generate funds by issuing additional equity or even creating a bond issue. Investors have an opportunity to generate some type of return once the new stores go live and start generating revenue that helps increase the company’s profits. In the case of bond issuance, a portion of the revenues generated by such deals can be used to pay off the bonds at any interest rate stated in the terms of the bonds, without needing to touch other assets held by the company.
The benefits of using growth capital as a means to manage expenses associated with a growth project often center around the ability to complete the project without placing undue stress on other revenue streams. This means the company can continue to support other operations at the same level even as it positions itself to expand. When carefully structured, the effort can also give that expansion time to take place and start generating income that helps compensate investors, making self-expansion effective.
While it is possible to use business loans as a means to finance a growth project, using venture capital or issuing securities to generate the necessary growth capital is often a preferable solution. This often allows the company more flexibility in paying off investors and can sometimes even be run on an interest structure that is lower than the rates associated with available business loans. As a way to manage expansion costs, growth capital is often the most practical approach to the endeavor.
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