Growth finance refers to capital loans and mezzanine finance. These are debt finance options most appropriate for financing high-growth businesses looking to make transformational changes.
Growth capital loans and mezzanine finance (sometimes called growth finance) are flexible forms of debt financing, but each share many of the characteristics of equity finance.
Growth finance gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back on time and in full.
Growth capital loans are a private equity investment for companies looking to finance a change in the business without a change of control or ownership. Funding comes from a combination of equity and debt sources.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership, or equity interest in the company, in case of default, or, occasionally, in cases of outperformance.
Growth capital loans and mezzanine finance are available to relatively mature businesses and can be tailored to the specific risks in the business, with a repayment plan to match the forecast cash generation.
Often referred to as ‘hybrids’, these products are bought and sold on an exchange or through a brokerage. They may give investors a fixed or floating rate of return and may pay interest or dividends. The issuer of the hybrid may have to repay the face value to the holder when they mature.
A convertible bond is the most common type and has the debt-like features of an ordinary bond. It is heavily influenced by the price movements of the stock into which it is convertible at some point in the future. Convertible bonds offer greater potential for appreciation than regular bonds, but pay less interest than conventional bonds, and are therefore cheaper for the business.
A convertible preference share pays dividends at a fixed or floating rate before common stock dividends are paid, and can be exchanged for shares of the underlying company’s stock.
Convertible securities offer greater income potential in the long-term than regular securities, so in the long-term can be more expensive. However, that is because the individual elements will not be available to a business at that point in time, or will not be appropriate.
Pay-in-kind toggle notes are another type of hybrid security where the issuing company can attach the payment of interest to the additional debt owing to the investor, meaning the company will owe the investor more debt but not pay interest immediately. The interest deferral allows the company to keep cash flowing.
Hybrids face the risk that the underlying company could perform poorly. They can also fail to make coupon payments and not be able to repay the bond’s face value at maturity.
Meanwhile, market price volatility can prove an issue for the business that has issued the hybrids.
Businesses can struggle to understand exactly how hybrids will perform in different circumstances. Due to their complex nature, corporate finance advice on hybrids is absolutely necessary.
Growth finance options are most appropriate for financing high-growth businesses and are typically used to finance the expansion of existing companies by venture capital investors. Expansions could include: product developments, penetration of new markets, infrastructure investments or strategic acquisitions.
Growth finance may be suitable if your business is more mature than venture capital funded companies and able to generate revenue and operating profits, but unable to generate sufficient cash to fund major expansions, acquisitions or other investments.
These factors can mean that business owners have found relatively few alternative ways to secure capital to fund the next stage of growth.
Growth finance options are also suitable for businesses that may already have significant borrowings and wish to finance a transformational change in the business.
Growth capital can also be used to affect a restructuring of a company’s balance sheet, particularly to reduce the amount of interest-bearing debt. This can significantly increase the amount of cash retained in the business for working capital.
Finance at every stage
Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.
- Business looking for growth finance should always seek professional advice. Find out more about securing the right financial advice.
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