6 Types of Growth Financing For Businesses
Growth is an essential part of a business. While it may have a loyal clientele and sufficient profits, many entrepreneurs do not have enough capital to expand their business. In such cases, the best path to take is to raise growth capital. While there are multiple ways to go about it, we share the six types of growth financing you can opt for for your business. Read along!
What is Growth Financing?
As the name suggests, growth financing is the type of financing availed by businesses to grow their business. Growth here can mean purchasing new equipment, hiring a bigger team, opening a new office, or even acquiring another firm. Typically, growth capital can be availed in two ways: Debt financing and equity financing. Debt financing is a form of financing where an organization borrows money from a lender and pays it back in regular installments with interest over a specified period of time. Equity financing is the type of financing where businesses get capital from lenders in exchange for a part of their equity.
You can learn more about growth capital in our blog post, Growth Capital: Everything You Need To Know.
What Are The Top 6 Types Of Growth Financing For Businesses?
As we established, there are multiple options businesses can choose from to get growth financing. Below, we talk about India’s six most commonly availed growth financing options.
Venture capital or VC funding is a type of growth financing that involves investing capital in startups or businesses with a decent operating history and a high potential for growth in exchange for equity. VC Funds typically come from institutional investors and high-net-worth individuals and are pooled together by specialized investment firms. When it comes to growth financing, venture capitalists operate in two stages: the expansion stage and the buyout stage. While the funds in the expansion stage go towards growth activities like hiring, production, and opening new branches, the funds in the buyout stage support growth activities like mergers, acquisitions, and IPO.
Also read: What is venture capital, and how does it work?
Line of Credit
Similar to a business credit card, a business line of credit (LoC) is a type of growth financing where a lending institution will give business owners a predetermined amount of funds that the business can borrow at any time. The interesting fact here is that the business has to pay interest only for the amount used from the line of credit instead of the whole amount. Lines of credit can broadly be classified into revolving and non-revolving. In the case of a revolving LoC, the amount goes back to the original limit after repayment. However, when it comes to non-revolving LoC, the borrowers get to use the available capital over a fixed period, with no change in the limit. The lender evaluates various factors, including the market value, profitability of the business, etc. The LoC can be unsecured or secured; it generally depends on the size of the amount requested and the eligibility criteria.
Traditional Term Loans
Traditional term loans are one of the most commonly availed growth financing in the world. Term loans are the type of growth financing where a business procures financial assistance from banks and other NBFCs for a set period of time. These loans are then paid back in installments, along with interest, over the said period of time. These loans are of two types: Short-term loans and long-term loans. Short-term loans are ideally taken for a period of less than a year, while long-term loans can range anywhere between 5-15 years or more. Banks typically have their own eligibility criteria that the borrower must fulfill to be able to apply for the loan. One factor that helps in these cases is an excellent personal and business credit score.
Invoice financing is the type of growth financing for businesses where the borrower avails capital by providing invoices for money against the amounts due from customers. This way, businesses can get capital immediately when needed instead of waiting for the customers to pay their dues. Invoice financing ideally doesn’t require any collateral and involves minimal paperwork. To top it off, most lenders take full responsibility for collecting the dues, saving the business any headaches. However, the charges for invoice financing can be hefty.
Venture debt is a type of non-dilutive growth financing used by high-growth companies. It is typically a term loan with interest payments and warrants on company stocks. The interest is predetermined by the lender and paid in installments. Most venture debt instruments involve interest payments only, as opposed to principal plus interest. The warrants can be converted into common shares in the future, which is a massive profit for the lender. Venture debt is also known to be more flexible than other forms of debt financing. If you’re looking for debt financing, this is an option you can consider.
An alternative to traditional equity and debt-based financing, revenue-based financing is the type of growth financing where the business can avail funds without any equity dilution. They can then repay the same as a monthly revenue percentage; no interest is charged. Some revenue-based financing lenders might not need personal guarantees or collateral during the application, making it a less risky and faster option for raising growth capital. As the amount you can raise is linked to business growth, most revenue-based financiers are ready to give you the money based on your past business performance.
It is safe to say that revenue-based financing is the best alternative to other equity and debt-based growth financing options in the market today. Talk to us today if you’re interested in how you can raise hassle-free growth financing.
If you need funds to start your marketing campaigns, your search ends here. We, at Velocity, are India’s largest revenue-based financier and offer growth capital of up to Rs 4 crore to D2C and e-commerce brands. Businesses with healthy revenue streams can get instant funds and can make repayments as their revenue grows. To get instant funds for your business, you can apply here!