Overview of Growth Debt
Growth Debt is a novel kind of growth financing that combines standard bank debt with venture capital. Growth Debt provides a flexible framework with variable payments that allows businesses to develop without diluting ownership. Growth debt allows businesses to expand without diminishing share ownership.
What exactly is it?
Many founders and equity investors are familiar with equity; however, few fully investigate debt financing options until much later in their company's life when they figure they might qualify for a traditional bank loan. As a result, founders and early investors often give away too much ownership (and associated rights and controls) because their knowledge of available funding alternatives is incomplete. In addition, to avoid "diluting" existing ownership stakes, companies are regularly demanding high valuations that in turn force new investors to drive larger investment rounds to achieve targeted ownership percentages. This typically results in further dilution, significant structure attached to new equity coming in, and an unnatural pressure to deploy more capital than often makes sense for the business. With appropriate use of growth debt, companies can raise the right amount of capital to support growth, have fewer and more rational valuation negotiations, and ultimately retain more ownership for existing stakeholders.
How it Works
Non-Dilutive: Growth Debt has no dilution effect on stockholders. As with conventional forms of non-bank debt, private equity, and venture capital, royalties are utilised as an alternative to warrants or other equity-linked instruments.
No Valuation: Growth Debt is appealing to businesses that are wary of stock dilution and protracted valuation disputes. The valuation debate is rendered moot by Growth Debt.
There is no need for business owners to force an exit or sell their company since Growth Debt is self-extinguishing.
Interest Alignment: Our interests are closely connected with those of business owners in order to boost top-line income.
Debt is usually less costly than equity.
To begin with, using debt to assist your company will be less costly for companies that anticipate significant development. In order to take into account the cost of debt (a loan) to the cost of equity (ownership in your company), two aspects need to be considered:
the interest you'd pay the lender during the life of the loan, and
the number of profits you'd potentially give up to an investor upon business exit.
Our cost of capital calculator can help you in evaluating your options. In most instances where you anticipate a significant increase in value, debt will be less costly than stock - therefore the smarter option.
Maintain control of your business
When you use equity financing, you often have to give up seats on your board. This implies that there will be more views on how the business should be run in order to achieve its growth goals and new sets of expectations. A situation where you're no longer in charge of your company's direction may arise after many rounds of equity raising and the addition of a few new board members. If you disagree with your other board members' approach, they have the power to overrule you and, in severe cases, expel you from your own company.
Obtaining capital more rapidly
Raising rounds of equity funding may take a long time, and if you've done it before, you know how frustrating it can be when your plans fall through at the last minute after all your hard work. Raising loan finance is faster than raising venture capital since it just takes 4-6 weeks to finish the process.
It may serve as an alternative to or a supplement to equity funding, depending on the situation. Using it correctly may help companies expand without causing founders and investors to lose control of the company or suffer excessive dilution. Working capital, expansion projects, and acquisitions are all funded using the loan proceeds, which are often structured as a three- to a four-year term loan. Growth debt, as opposed to conventional bank financing, is accessible to businesses with negative cash flow or few substantial assets.