What Every Business Owner Needs to Know About Growth Capital
Growth capital is a type of capital used to accelerate the growth of a business. You can use it to increase revenue, improve profitability, or create great technology. Growth capital can come in the form of loans, in the form of equity fundraising, or venture capital investments. You can also use it to fund virtually any type of business activity, even if the cash outflow is significant and if the expected long-term growth rate is low.
Capital is the fuel that lights up the engine of your business. Growth capital can help you expand your reach and spend on marketing or research and development. In short, growth capital or business finance is money you spend to increase your chances of success.
Growth capital works on several levels. You can use it to help pay for new equipment or lease office space, for example, or to expand your workforce. As your business matures, growth capital becomes vital as you attain significant success.
How Is Growth Capital Different from Other Forms of Capital?
To understand growth capital, you must first understand the other forms of capital. That is working capital and equity capital.
Working capital is money used by businesses to pay bills and provide other daily activities that keep a business running.
Think of it this way: If you want to keep your home healthy and know you can pay for it with cash coming in, working capital is money that will keep your home healthy. This is the same thing with businesses: They can pay bills such as rent or mortgage payments if they have cash lying around. The things that keep their business running.
Equity capital is one of the two core elements that a firm needs to function. This happens to be the largest source of financing for a business, whether it is large or small. Every company has equity capital, and it has a direct relation with the value of company shares.
Equity capital usually refers to that portion of the organization’s money, raised in exchange for the percentage of ownership in the company.
Why Is Growth Capital Important?
The following are the main reasons why businesses need growth capital.
To Remain Competitive
Many founders and executives will need to raise money from investors to expand their businesses. Often, founders and execs think their companies can grow without new capital. But that’s often wrong — and could be fatal if you want to build a successful business in the long run. Raising money from others helps your team stay focused on what they do best: building great products and growing the company.
To Expand Operations
Growth capital is generally necessary to grow a business rather than meet current operations. You can also use growth capital to expand your business beyond your current geographic area or even internationally. As a whole, growth capital is necessary for any small business operation in need of business finance. It allows you to expand your operations without incurring more debt or carrying high operating costs.
Activities Businesses Fund with Their Growth Capital
Capital is the resources (money, things, people) that allow a business to grow. Growth capital may come in the form of loans, in the form of equity capital, new employees, or some other form. Growth capital can take many different shapes and forms. This is because it describes growth on a micro-level than other forms of capital such as profits and revenue.
Growth capital is money you use to help your business expand or launch new operations. There are several uses for growth capital, but it’s typically used to help start-ups pay for equipment. The other costs form part of expanding their operations. You can also use the money to advance loans to other businesses in need of extra capital or help an existing company meet its daily operating costs.
Additional activities a company uses for its growth capital are:
- Purchase additional inventory
- Hire additional staff
- Expand your space or facility, or undertake significant renovations to existing facilities.
Besides the standard work-for-hire processes, some growth capital transactions may include loan guarantees or lines of credit. These loans cover additional working capital needs.
When Should Businesses Seek Growth Capital?
When does the business itself need growth capital? When the product is good but not ideal for the market, asking for growth capital isn’t a bad idea. Often, an industry can only grow with additional capital. If your product or service lags behind the competition, extra capital will help propel the company forward.