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Sometimes referred to as growth equity or expansion capital, growth capital is funds that are set aside to aid a business in growing or expanding the current operation in some manner. These funds may be earmarked for the construction of new facilities, movement into new consumer markets, or as funding to help restructure a business in a manner that increases opportunities to become more prominent within the marketplace. Raising growth capital often involves choosing to seek venture capital from investors, or choosing to issue shares of preferred stock that help to create a pool of funds that are in turn used to fund a specific growth project.
The idea behind growth capital is to create a resource that is above and beyond the income needed to manage the expenses of the 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 that wishes to open two new stores may seek to generate the funds by issuing additional shares of stock or even creating a bond issue. Investors have the opportunity to generate some type of return once the new stores are up and running, and begin to generate revenue that helps to increase the bottom line of the business. In the case of the bond issue, a portion of the revenues generated from those stores can be used to pay off the bonds at whatever rate of interest stated in the bond terms, without the need to touch any other assets held by the company.
The benefits of using growth capital as a means of managing the expenses associated with a growth project often focus on the ability to complete the project without placing undue stress on other revenue streams. This means that the company can continue to support other operations at the same level even while positioning itself to expand. When structured with care, the effort can even give that expansion time to take place and begin generating income that helps to compensate investors, effectively making the expansion self-sustaining.
While it is possible to use corporate loans as a means of funding a growth project, using venture capital or issuing securities in order to generate the necessary growth capital is often a preferable solution. Doing so often affords the company more flexibility in repaying investors and can sometimes even be managed with an interest structure that is below the rates associated with available business loans. As a way to manage the cost of expansion, growth capital is often the most practical approach to the effort.
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