Accessing growth capital: how to choose the right finance for your business

Business growth can start from strategic planning or increased demand, but an injection of capital is often required to meet key objectives. If you’re seeking funding to move your business forward, it’s important to explore the different growth capital options and carefully judge which route is right for your company.

Here, we discuss what growth capital entails, the various financing options to consider and the potential impact to expect from these funding solutions.

What is Growth Capital?

Growth capital is finance that helps businesses fund assets and operational needs to navigate their next growth stage, whether expanding into a new market, diversifying or acquiring another company. You can choose from equity financing, debt financing or a hybrid solution combining both formats.

Seeking additional capital can help you reach your goals and remain competitive in an ever-evolving commercial landscape, helping you achieve more in a shorter time scale or larger scale.

The key to the idea of growth capital is the ability to enhance your growth trajectory as a result of the investment. Rather than taking out a standard loan to ease cash flow or make a one-off purchase, growth capital fuels business expansion. For example, you may need to acquire new equipment, recruit new talent or fund operational change and promotional activity.

Types of Growth Capital Financing Options to Consider

There are various types of growth capital, each with benefits and cost considerations. Your choice of capital will have a direct effect on the growth options available to you, so matching the right finance with your goals is a key step. Your business plan should include a clear path for how the capital you raise will contribute to your expansion and the results you need to deliver in order to justify the finance.  

Currently, access to capital is deemed one of the main barriers to small business growth. A 2024 Goldman Sachs survey revealed that 77% of small businesses were concerned about their ability to access capital. Alternative business finance providers are trying to change this perception and provide quick access to flexible funds to power SME growth.   

Equity Financing for Growth

Equity finance is a go-to option for entrepreneurs looking for significant backing to move out of the start-up phase or acquire a new business. Drumming up interest from wealthy investors and other entrepreneurs is an attractive option, especially as it avoids monthly repayments that eat into profits, but it can also be a complex and competitive journey.

Types of equity financing:

• Venture capital – money sourced from several investors in return for funding that involves giving up part of your ownership, voting rights and future profits
• Angel investors – entrepreneurs that help companies by investing their personal money in your business growth in return for an ownership percentage
• Private equity capital – investors looking to acquire private companies or take public companies private to achieve long-term profit gains

Pros:

• No monthly repayments of debt are required
• Investors share your financing risks
• Gain resources, connections and expertise

Cons: 

• Losing a proportion of control and ownership
• Investors gain a share of future profits
• You may be under pressure to generate high returns

Growth equity financing suits start-ups – especially those pre-revenue – with high growth potential and innovative businesses in industries like fintech, green energy and pharmaceuticals, which require significant research funding.

Equity investment has slowed in recent years due to rising interest rates and economic uncertainty, with global VC investment falling from $531 billion in 2022 to $344 billion in 2023, with investors reluctant to commit to big deals. However, there are more positive signs in 2024, particularly in the energy, tech and healthcare sectors, influenced by the ongoing clamour for AI innovation.

Debt Financing for Growth

Essentially, debt financing is a loan or form of credit that requires regular repayments after receiving a lump sum to invest in key business areas.

Types of debt financing:

• Bank loans – traditional loans from banks that offer access to significant funds but can prove time-consuming and restrictive
• Small business loans – secured or unsecured loans from commercial lenders and brokers for SMEs needing fast and flexible finance
• Lines of credit – predetermined sums to draw from as needed, where you only pay interest on funds used
• Asset finance – a financing solution to fund assets and equipment crucial for achieving growth ambitions, which can be a hire or lease agreement

Pros:

• No dilution of control or ownership
• Interest payments are tax-deductible
• Profits go straight into the business 
• Monthly repayments make for predictable forecasting

Cons: 

• Ongoing debt can impact cash flow and failing to keep up with payments can hit your credit rating
• Certain loans require collateral, which adds to your risk
• Interest paid on loans can eat into profits

Debt financing suits small businesses with steady revenue that want to maintain control, fund new equipment and enjoy predictable monthly repayments. However, some lenders’ upper limits can be restrictive if you have large growth funding requirements.

Other Alternative Financing Solutions

Entrepreneurs and growing companies are increasingly exploring new funding avenues due to the limitations of traditional finance sources. Here are some other alternative financing solutions to consider: 

• Revenue-based financing – consists of capital provided based on historical and projected revenue, with money repaid as a percentage of future sales
• Crowdfunding – technically a type of equity financing that allows you to customise funding tiers and state what investors receive in return
• Mezzanine financing – a complex combination of equity and debt financing conditions, enabling a level of control and unlocking large sums of capital
• Invoice finance – funding to ease cash flow problems caused by late invoice payments, but not necessarily suitable for large-scale growth needs

Learn more in our article on alternative finance solutions.

Measuring the Impact of Growth 

To gauge the potential impact of growth capital on your business ambitions, evaluate your financial health across various metrics and consider the challenges you face with sourcing finance. This will help you judge the impact to expect with different funding types and amounts that you want to borrow or secure.

Aligning Growth Capital with Your Business Goals

It’s vital to match your source of growth capital with your business needs and goals to put yourself in the right position to make the most of your investment.

Define your needs and goals in the short- and long-term, scoping out how much you need, for what areas and for how long. Then, weigh up the pros and cons, in line with your requirements, to find the best-fit solution. Also, consider your industry’s investment appetite and growth potential when deciding on your funding strategy.

Financial Health and Stability

Before approaching prospective lenders and investors, assess your financial health and growth prospects. Consider the following metrics to get a clear picture of your company’s financial health and stability:

• Net worth and profit margins
• Revenue growth
• Cash flow
• Debt-to-income and current ratio
• Earnings before interest, taxes, depreciation and amortisation (EBITDA)
• Credit score
• Emergency funds

Once you have a clear picture of your financial standing, you can assess the short and long-term impact of financial lending and investment for your growth plans.

Business Operations and Strategy

Growth capital enables you to accelerate expansion, acquire the tools you need to progress and increase operational efficiency. The funds can help you reach your next development stage and stay ahead of competitors.

However, don’t ignore the risks of growth capital. If you’re in a tricky financial predicament or volatile sector, accumulating debt and new financial obligations may put you under increased pressure. And equity finance means loosening your grip on a proportion of the business.

iwoca Flexi-Loans for Growth Capital 

If you think a small business loan is the best route for securing funding, iwoca Flexi-Loans can offer a growth capital solution that fits with your needs and goals.

We designed our flexible loans with small businesses in mind, so we don’t need endless details about your company to make a decision.

Here are the benefits of our Flexi-Loans for small businesses:

• Applications are simple and often take just five minutes
• We make fast decisions, and you can access funds within hours of approval
• There are no early repayment fees or long-term commitments, and interest is only charged for days you have the money
• You can apply for top-up funds as and when required

How to Secure Growth Capital with iwoca

Securing growth capital is simple with iwoca. We remove unnecessary barriers small businesses experience when applying for traditional bank loans.

It’s easy to apply, and you’ll get a decision within 24 hours. Learn more about how to apply for a business loan, or check out our handy business loan calculator.

We’ve helped over 90,000 companies reach their growth ambitions since 2012, providing over £3 billion in funds. Discover the impact of our growth capital on different businesses in our success stories, and see why we’ve earned a Trustpilot rating of 4.8/5.

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Growth Capital FAQs

What is the Difference Between Growth Equity and Venture Capital?

Venture capitalists typically target early-stage startups with high growth potential, while broader growth equity solutions help established companies expand their operations. 

What is the Difference Between Growth Equity and Private Equity?

Private equity often involves purchasing entire companies or taking public companies private, restructuring them to boost their value. Growth equity focuses on expanding existing businesses. 

How Does Growth Capital Differ from Traditional Business Loans?

Traditional business loans require fixed repayments, with often strict criteria and conditions. Growth capital can be debt or equity financing, dedicated to business expansion, and offers more flexibility.

When Should a Business Consider Seeking Growth Capital?

Businesses with good growth prospects and financial health should consider growth capital to scale operations, purchase new assets and enter new markets. However, some alternative finance lenders offer funding for those with poorer credit.