Growth capital – the increasing diversity of options to fund business investment

HMT have recently announced the closing of a multi-million pound growth finance facility for Chorus Global, a rapidly-growing IT managed services and cyber security service provider, from alternative lender Boost&Co.

The team at Chorus faced a familiar situation to many growing businesses when they engaged HMT. We often support founder-owned businesses that are growing rapidly with a differentiated product or service and loyal customers, but where there is a clear opportunity to accelerate investment further with external capital to capture an identified market opportunity. Be it technology or product development, expanding sales headcount or driving marketing spend, for entrepreneurial firms it makes sense to invest today in order to drive growth tomorrow.

However sourcing and structuring true growth capital can be one of the most challenging financing situations that a high-growth business will face. Typically the risk profile sits outside the appetite of conventional commercial lenders, requiring owners to instead sell a majority or significant minority of the equity in order to raise sufficient funding.

Fortunately, there is an increasing range of non-traditional lenders offering flexible forms of growth finance that can provide ambitious business with the capital they need to invest but without giving away significant equity.

For established companies already generating stable multi-million revenue, growth lenders can look beyond traditional risk ratios and can assess the deliverability of a 12-18 month business plan to support the lending decision. As a result, borrowers can often gain support despite the investment in costs depressing profitability or even driving a loss in the short-term.

Structured as debt, lenders do not seek control or board representation and can offer flexible financial covenants designed around the forecast earnings and cash profile in the business plan. For the strongest lending propositions several growth lenders will not impose financial maintenance covenants at all.

Inevitably the higher risk profile of growth lending comes with a higher return requirement for the lender. For some this means an annual interest rate in the high single digits, for others the lender may also require an equity warrant to share in some of the upside as the growth plan comes to fruition. Nevertheless, the all-in cost of funding is always significantly lower than selling equity, ensuring founders and existing shareholders preserve their share of value. At HMT we have seen the decision to finance growth with debt translate into multi-million pounds of additional value for shareholders at a future exit event, compared to if the business had used equity instead.

Above all else the emerging growth debt offerings in the UK are characterised by their variety. No two structures are the same and debt packages are bespoke to the companies in question.

HMT’s specialist fundraising advisory team has supported numerous ambitious companies to navigate this complexity and to access the most appropriate sources of finance. If you’d like to learn more about your funding options from advisors with answers, please get in touch.

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