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Growth Financing - Challenges And Opportunities Of Growth Financing In Your Business

Growth Financing is a company’s use of debt, equity and hybrid financing techniques to achieve business expansion in a cost-effective manner. The focus of growth financing should be on identifying the optimal financing solution for a company.

Jun 24, 202240 Shares1.2K ViewsWritten By: Alastair Martin
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  1. What Is Growth Financing?
  2. How Is It Typically Structured?
  3. The Challenges And Opportunities Of Growth Financing
  4. People Also Ask
  5. Conclusion

For a businessto be successful, it needs to grow.

It gives entrepreneurs the chance to take advantage of new opportunities, expand their products and services, attract new customers, boost sales, and hire more people.

In fact, growth is essential to the long-term survival of any businessbecause it lets them meet the needs of the market.

It may also give a business more credibility and help it stay ahead of the competition.

But in order to grow, businesses need money.

Whether your company is a small SaaS startup, a big healthcare company, or something in between, the goal is always growth.

To make this happen, businesses look for growth financing, which is moneythat helps them reach their expansion goals and move to the next level of their business.

But growth financing can be hard to find, especially for small and medium-sized businesses (SMEs).

How to Handle the Challenge of Financing Growth

What Is Growth Financing?

It's pretty easy to understand: growth financing is money that a company uses to grow.

For a business to take advantage of opportunities that require it to scale up production, make a big advance order, or invest a lot in growth in other ways, it may need growth financing.

As a business grows, it also needs more money to grow.

A hand using tablet with bar graphs floating on it
A hand using tablet with bar graphs floating on it

Most of the time, a big investment is needed to improve the business, boost sales, or get into more markets.

Businesses may need money to buy supplies to fill a big order or to buy new tools to improve or grow their services.

Growth financing is a way for businesses to get to the next level and make more money.

How Is It Typically Structured?

A hand drawing an arrow gowing upward
A hand drawing an arrow gowing upward

Traditional bank lines of credit and SBA loans can be used for growth financing.

Businesses can seek venture capital, angel investors, or an IPO of stock.

All of these can bring in significant funds, but some are difficult to access and require size, time, and documentation to begin.

Certain suppliers may offer vendor and seller financing to companies.

First, companies may offer discounts for long-term purchases.

Vendor and seller financing is often available, but it can be more expensive than other methods of financing inventory or equipment.

In essence, a buyer pays off a business seller over time, allowing a transaction to close and the seller to receive ongoing payments.

Other options, like debt and mezzanine financing, help small and mid-market businesses grow.

They combine equity and debt financing.

Business development companies and other alternative lenders offer high approval rates for these financing options, many of which are tailored to small and midsize businesses.

Here are some growth funding options.

Non-Bank Cash Flow Lending

Enterprise value lending is another name for non-bank cash flow lending.

Many traditional lenders, like banks, look at a business's equipment or real estate when deciding whether or not to lend money. Business development companies, on the other hand, offer cash flow lending.

This type of debt financing looks at how a business might grow to decide whether or not to give it a loan.

Alternative lenders offer this type of debt financing, which is great for growth financing because it is based on a business's growth potential.

Business development companies also help people reach their goals by giving them flexible payment options and professional advice.

Recurring Revenue Lending

Recurring revenuelending is another type of debt financing that works well for small and medium-sized businesses, especially those with SaaS or other subscription-based, recurring-billing models.

Even though these SMEs and startups may not have physical assets that can be used as collateral for a loan, they do have steady and growing sources of income.

Before giving a company this type of financing, lenders look at its annual recurring revenue (ARR) or monthly recurring revenue (MRR).

Home Equity Loans/Lines Of Credit

These are common ways for small businesses to get debt financing, but they are different from other types because the business owner has to use his or her own assets and credit instead of the business's.

These types of bank loans may have low interest rates if you have owned your home for a while and can borrow against its equity.

But they have a big drawback: if a business owner doesn't pay back the loan, he or she could lose the house.

Debenture

Like a bond, a debenture is a type of debt instrument.

But it is not backed by collateral or physical assets. Instead, it is backed by the company's reputation and how well it has done.

When making a debenture, cash flow, credit scores, and other things may be taken into account.

Mezzanine Financing

Mezzanine financing is subordinate to other debt from the same lender.

It combines debt and equity financing.

It's a higher-risk form of debt financing because it's subordinate to equity but senior to debt.

The options in mezzanine financing make it attractive for lenders to convert debt into equity.

Mezzanine debt bridges the gap when a company can only offer so much equity and a lender can only contribute so much debt.

In the 1980s, insurance companies and S&Ls dominated mezzanine financing.

Insurance companies have been joined by pension funds, hedge funds, and leveraged public funds.

The Challenges And Opportunities Of Growth Financing

Word Challenge written on a paper and word Opportunity reflecting on mirror
Word Challenge written on a paper and word Opportunity reflecting on mirror

Leasehold Improvements

Most banks won't pay for improvements to leased property.

The equipment, retail, and warehouse parts of a beverage production facility make things even more complicated and make it much harder to find a lender.

Collateral And Equity

Conventional lenders can't give out credit without collateral and balance sheet equity, which are usually hard to come by when a business is growing.

They need this security because taking risks doesn't pay.

A good bank will have a Return On Asset of between 1.75 and 2 percent.

To put this in perspective, investors in stocks usually look for returns of 30% or more.

Investors And Partners

During times of growth, equity investors can be a good source of money because they are betting on future cash flows and getting a cut of future profits.

The right equity investors can also bring intangible value, such as experience in the field and connections with other people in the field who can help the business.

Growth Through SBA Loans

The Small Business Administration (SBA) loan program gives craft breweries the chance to grow in new ways.

SBA loans are an alternative that often fills the gap between the equity phase and the conventional lending phase.

SBA 7(a) loans can greatly reduce or even get rid of the need for a down payment or equity.

The money can be used to grow, buy, build, make improvements to leased property, buy real estate and equipment.

Craft breweries can use this unique small business lending platform at banks like Live Oak Bank, which specializes in cash flow lending.

People Also Ask

What Are The Three Types Of Financing?

A small business owner can only get one of three types of financing: debt financing, equity financing, or a mix of the two.

Debt financing comes from banks, government loan programs, or anyone else you can persuade to lend you money, which you will have to pay back with interest over a period of time.

What Are The 5 Sources Of Finance?

Source # 1 - Commercial Banks.

Source # 2 - Indigenous Bankers.

Source # 3 - Trade Credit.

Source # 4 - Installment Credit.

Source # 5 - Advances.

What Are Examples Of Growth Investments?

High-risk growth instruments like penny stocks, futures and options contracts, foreign currency, and speculative real estate like undeveloped land are used by people who want to get a thrill or make a bet.

There are also partnerships for oil and gas drilling and private equity for high-income investors who are willing to take risks.

Conclusion

Companies that want to take their successes to the next level can get the money they need to do so through growth financing.

Alternative lenders offer small and mid-market businesses quick, flexible, and easy-to-use application processes.

When looking for growth funding, it's important to look for a business with a history of success.

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