Growth loans are a new and alternative way for fast-growing small and medium-sized enterprises to fund themselves. They combine features of traditional debt and equity finance, and are designed to help your business to grow without requiring you to give up control.
Melissa Yvonnou, investment professional at BOOST&Co, explains what she’s looking for from companies seeking Growth Debt and explains how to give yourself the best chance of securing the funding you need.
1. Show strong momentum
Compared to traditional banks, growth lenders invest earlier in the lives of companies and provide larger amounts. They rely on the company’s future growth rather than its past performance to repay the debt.
Companies looking to raise growth debt therefore need to demonstrate they will be able to generate enough cash to service the debt repayments, or that there is a clear path to a future equity round.
2. Highlight scaling opportunities
Growth lenders actively seek scalable business opportunities because they offer a risk profile that is well matched to growth debt.
“Scalable” means the business opportunity is fully proven but needs additional resources to expand — for example, the business is looking to take on sales staff, invest in production capacity, or to take its product or service to new locations. For growth lenders, this is an opportunity for clear growth and controlled risk – the company is simply doing more of what it is already very good at.
3. Develop clean and robust financial forecasts
Being able to provide clean business information suggests your company has a mature management team and will help ensure a quick and smooth funding process.
Ideally, financial forecasts will include separate forecasts, on a monthly basis, for profit and loss, cash flow, and the company’s balance-sheet. The forecasts should be in an Excel file, with no hard coded numbers, so that investors can customise the document as they see fit.
Make sure you have your forecasts ready before approaching lenders and that you won’t need to change them later on. Growth lenders will expect to see:
- A fully funded business plan — no matter what your fundraising assumptions are, cash balances must be positive and sufficient to service the debt at all times;
- Achievable forecasts — what can the company realistically achieve with the funding it has available? During due diligence and in the future, growth lenders will measure your actual performance against your business plan so it is important to demonstrate consistency and the ability to forecast properly;
- Clear assumptions on funding, key performance indicators, revenue build-up, costs structure and working capital dynamics.
4. Highlight good downside protection
Unlike traditional bank debt, growth debt is available to businesses with no significant assets to use as collateral. However, growth lenders will be more comfortable investing in companies where they can see how their capital might be repaid if growth is low or if the business is struggling.
You can help by providing:
- good visibility on future revenues;
- details of how you could reduce costs,
- details of company assets that could be sold to generate cash such as fixed tangible
- assets, stock, account receivables.
- details of what a third party might be willing to buy if the company gets into difficulties – for example, long-term contracts, blue-chip customers, a recurring revenue base, intellectual property or technology, or strong positioning in a niche market or in a country.
5. Get the quantum right
Raising growth debt over equity is attractive to fast-growing businesses because it protects the equity of existing shareholders, has a lower cost of capital, and the process to raise funds is quicker. However, this debt must be paid back over a fixed period, which means you’ll have less cash on hand to grow the business.
Growth lenders can help you decide how much funding to seek, but it’s better if you think through a structure that suits your business. What debt repayments can your cash flow sustain without putting strains on your expansion plans?
Read more on raising Growth Debt for your business: The Growth Lending Guide for SMEs