Expansion capital (also referred to as growth equity or growth capital) is a type of private equity investment used by reasonably large companies seeking capital to finance growth and expansion by restructuring operations, entering a new market or fund a major acquisition without changing how the business is controlled. It is a flexible method of financing minority investments in a company in an effort to increase the amount of profit generated by the company. It is a great method of financing growth and expansion in companies that cannot afford to borrow any additional debt, due to their current debt levels or the stability of their earnings.
As a result, this method of financing is usually structured as preferred capital, even though some investors will use different hybrid securities that combine a contractual return (such as payment of interest) with an ownership interest in the company. Examples of companies that have made expansion capital investments include Softbank which made a $750 million investment in Uber rival – Grab and Airbnb which raised approximately $447.8 million in Series F round of funding which it plans to use in adding flights and services to its already existing online marketplace and hospitality service.
How it works
Companies seeking to finance transformational business events can seek expansion capital. Expansion capital can include funds needed to increase expenses, inventory, plant and equipment capacity, marketing costs and working capital levels. It can also include capital for business acquisition and transaction costs and any other corporate investments that support the growth of the company.
The good news is that it is actually easier to raise expansion capital than it is to raise start-up capital. This is because, at this point, investors will be able to see what your company is all about and will be able to judge whether or not you are a good investment.
Raising Expansion Capital
Because expansion capital resides at the crossroads of venture capital and private equity, it is provided by a number of different sources. Growth capital investors traverse a number of debt and equity sources such as late-stage venture capital funds, private equity capital funds, sovereign wealth funds, Business Development Companies (BDCs), family offices and mezzanine funds. Expansion capital can also be an interesting alternative in markets where startup business funding is very competitive or where leverage is limited to finance buyouts.
A company can also build up its expansion capital. As working capital keep on rising, companies can reinvest that money into the company. This money becomes growth capital (expansion capital) which accumulates over time. When the company needs to fund a major expansion or purchase new plant or equipment, it simply uses the expansion capital it has accumulated over time.
Importance of Short-term Expansion Capital
As has been mentioned earlier, expansion capital can be used to finance transformational investment projects such as major growth and expansion projects in a company, especially in companies that are unable to bear any additional financial leverage due to their current debt levels. In addition, it can also be used to restructure a company’s balance sheet by reducing the amount of debt (or leverage) present on its balance sheet.
Short-term Expansion Capital can also be used to extend a give a company additional time between financing rounds. Such additional time can be used to accomplish additional objectives that will increase the valuation of a company. No matter what you decide to use your short-term expansion capital for, it is important to always keep it separate from working capital (capital used for the daily running of the company).
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