Growth Capital

Should your company fit the bill, let us examine the growth capital options available to your firm.

Private debt

Private debt can come in the form of a revolving credit line, term loan or preferred equity such as convertible bonds or warrants. Loans tend to be covenant lite. Repayments start immediately after securing a loan, though you can structure a loan and the repayment schedule to meet your company’s needs.

Venture capital

Raising venture capital is an expensive endeavour due to equity dilution, though the advantages are that you are not under pressure to make repayments immediately.

It is also generally accessible at all stages of a company’s development, and you can tap on a VC’s extensive network of relationships, expertise and credibility.

Bank financing

Banks can provide financing with lower interest rates, but this is typically only to the largest and most established firms.

As mentioned at length across all our articles, bank lending and underwriting standards have tightened considerably post the Global Financial Crisis in 2008. Further, banks continue to rely on traditional valuation models and debt metrics which are not suitable for fast growing, small-mid sized technology companies.

Evaluation of the various financing tools as growth capital

Compared to venture capital, private debt is non-dilutive and is also not tied to current valuation. A common mistake we have seen with many small-mid size technology companies is that they give away too much equity too early. Generally, private loans are not structured with warrants but even if they are, these warrants typically do not dilute ownership by more than 1%. Further, you can maintain greater control and not be subject to active involvement of the VC with private lending.

Compared to bank loans, you can take on a greater loan amount with private debt. There are a number of different methodologies in calculating loan amount for private debt, such as i) 25-30% of total equity raised; ii) 5x EBITDA or iii) 1.5x annual recurring revenue (ARR). For bank loans however, the loan amount offered is tied to current performance and disadvantaged by traditional debt metrics and loan underwriting models.

Finally, securing private debt is a much faster process and you can structure it to be a very flexible financing tool. You can also tap on a lender’s network, which is not necessarily less extensive than other VCs.

That said, all three tools are important financing tools and can be used as growth capital in varying degrees and at different times, depending on a borrower’s business model and stage of development.