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Growth Equity Financing or Growth Capital Finance?

Published on 26th November 2018 - Last update on 31st March 2020

Growth. Every business needs it but not everyone knows how to achieve it. Yet no matter what stage you’re at in your development or what you’ve achieved already, focusing on the next step is key. A common challenge for scale-ups, however, is funding. But if you’re looking to support your business’ growth and reach new heights, there are many Growth Financing opportunities available that could help. Two such pathways are Growth Equity Financing and Growth Capital Finance, but which one is the most suitable for your business right now?

Growth Equity Financing

Whether you’re an SME or an established company, Growth Equity Finance can be a fast track way of acquiring funds for your business. Bound by no usage restrictions other than the intentions expressed to investors, Growth Equity Financing gives you the means to seize upon vital growth opportunities and reinforce your dominance over the market. It works by you appealing to investors such as venture capitalists, angel investors, corporate entities or private individuals, encouraging them to invest on account of your business’ current success and future potential. Should they agree to invest, they’ll provide you with their own capital but, in exchange, you’ll have to hand over equity (shares) in your business.

This means that you’ll no longer have a 100% stake in your business and a portion of your profits will go to your investor(s) according to how much equity they hold. So before accepting their capital, you may want to assert a clause for allowing redemption arrangements. This means that you can eventually buy back the shareholding from each investor. Just remember that this will include 100% of the capital they initially invested plus any returns their investment has made since then. Plus, depending on the size of their shareholding, investors may have a say in how your business is run and what decisions are taken. However you need to be aware of any downsides to this type of funding as relationships have the potential to turn sour and if you have a falling out with your investors, they could band together and elect new management. This is why must ensure that you always retain a majority share in your business.

Got ambitious growth plans for your business, but need access to more capital? Unsure about what finance solutions are on offer? Apply for Growth Finance or learn more about how your business could benefit.

Growth Capital Finance

However, if you’re looking for another way to raise capital whilst limiting how much equity you need to give away, you could apply for Growth Capital Finance instead which is classed as a type of Mezzanine agreement. Mezzanine Finance is a form of borrowing which is a cross between Debt Financing and Equity Financing and could offer you access to a large amount of capital, secured against your business itself. However, what you must appreciate is that no two Mezzanine Finance agreements are ever the same - they’re always going to be unique between you and the lender.

As such, the amount of capital you could borrow is generally based upon the cost of the project involved and your ability to find a lender willing, or able, to provide what’s required. Plus, the agreement can be used for any number of large-scale projects such as real estate purchase, large-scale constructions (e.g. a large factory or airport), business acquisitions or partner buyouts - whatever large projects your business needs to grow. In addition, Mezzanine Finance agreements are often high-interest agreements that could be established with terms of up to 5 or 6 years. But, this is also another area which is unique between you and the lender, meaning that the term on offer could be longer or shorter.

Finally, you also need to discuss with the lender how you intend to repay them, which is another unique aspect of the agreement. Though there are other methods that exist as well, two of the most commonly used repayment schemes employed by lenders are Fixed Monthly Repayments (repay set sums each month, plus interest) or Rolled-Up Repayment (repay the money borrow and the interest accrued in a single repayment when the agreement mature). However, this is something that needs to be discussed and agreed on an individual level. However, Mezzanine Finance is typically secured against your business itself so if you default on the agreement for any reason, the lender will receive an equity stake in your business appropriate to how much they’re owed. As such, Mezzanine Finance is often considered a high-risk form of lending but can prove invaluable if you need a large lump sum and enjoy having an agreement which is tailored specifically to you.

Need help supporting your business’ growth?

Whilst both Growth Equity Finance and Mezzanine Finance are great ways of acquiring the funds to scale, if you wish to support growth without giving away or risking in your business there are many other debt finance solutions that you can choose from as well. Depending on your goals, how much capital you require and the way in which your business operates, you could qualify for finance solutions such as Secured Business Loans, Unsecured Business Loans, Commercial/Buy-to-Let Mortgages, Bridging Loans, Factoring or Overdraft Replacement to name a few. However, in order to choose the most appropriate finance solution to support your growth ambitions, you need to understand how each product works, which is where speaking to a qualified business finance professional could prove invaluable. So whether you're looking for finance for hospitality, leisure, medical, construction, or any other type of business, that’s where we can help.

At Rangewell, we’re an Access to Finance specialist and have mapped over 400 lenders to offer business owners like yourself an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the entire application process. So if you’re looking to grow your business and need help sourcing a suitable finance solution, apply for Growth Finance today or find out more with Rangewell.

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David Harrison

David Harrison

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