Growth capital has immense value for up and coming businesses. It is best understood through how it can be used, and the different types of capital that can provide it. Most entrepreneurs rarely go out to search for growth capital per se, though it is the single largest need of most of these companies. The name growth capital has never really caught on in the private capital markets.

Perhaps this is because banks and Wall Street players have always been the ones defining the language and labels used in the financial world. Growth capital is used to help a company grow, usually in one of two ways – externally or internally. External growth involves a merger or acquisition where a company is adding a large and entirely new pool of resources to its existing resource base. Internal growth involves using the internal resources of the company to grow in new and different directions. Growth Capital can be used to develop new products, add new sales resources and expand the size of the organization.

Companies also can utilize growth capital to improve their working capital position, allowing them to have cash on hand to fund higher levels of current assets. As sales build, receivable collections can lag causing companies to need more cash on hand up front to fund higher payments to employees and vendors. Growth capital gives companies the freedom to invest in new projects without the concern about running out of money for the project. As opposed to using internal cash flow to fund a business, growth capital provides much larger quantities of financing. This allows for investment at a large scale that can make a big difference in the business model.

Instead of only being able to afford to hire one new sales person, you can now hire 5 sales people. Instead of developing a new product over the next two years, you now have the ability to fund development over the next three months. Most growth capital is provided by lenders or investors with a long term investment period. These funding sources tend to value the business on a cash flow approach, enabling them to provide more funding to a company than a conventional asset based lender. Growth capital is a critical and nurturing element for companies seeking long term growth.