What is expansion capital and when might I need it?

In this detailed guide, we discuss the most common reasons entrepreneurs seek expansion capital and how it can be used to grow your business.

2 November 2020

In this article we’ll explain what’s meant by expansion capital, what forms it typically takes, and in what conditions it’s used by entrepreneurs and business owners.

Imagine this scenario. You’re running a business and you’ve built up a good set of clients and team. Thanks to them, you’re generating a solid turnover. However, you’re ambitious and you want your business to grow even more. Let’s say you have plans to double the size of the business in two years. The problem is that, on current forecasts, it will take more than ten years to achieve that growth.

You want to find a way to grow more quickly. Perhaps you could open a new site in a different region, maybe expand into a new product line, or, even better, take over a competitor that is already doing the kind of business you’d like to get into.

But in order to make those transformative changes at pace, you need investment and support. It might be time to consider expansion capital.

What is expansion capital?

In the broad sense, expansion capital simply means money to help you expand your business. However, that business funding could come in different forms and with a variety of different terms on offer. For the purposes of this article, we’ll mainly consider expansion capital that comes in the form of equity investment. This is one of the types of investments we offer here at BGF, alongside long-dated loan notes, and we believe it’s an appropriate solution for a large number of high-potential, medium-sized businesses.

What we mean by equity investment is money given to you in exchange for a share of your business. Unlike a bank loan, equity investment comes without having to make ongoing interest payments. It’s a straight swap. An investment of, say, £5 million would entitle the investor to receive, for example, a 25% share of the business.

What is expansion capital used for?

Here are some of the common reasons entrepreneurs seek expansion capital:

  • Product development. Let’s say you want to expand your product range. Expansion capital can help to pay the costs of researching, designing and testing the new product. Genedrive, a company developing portable genetic tests for life-threatening diseases, is one of more than 50 companies that have used BGF funding to develop new products.
  • Increasing production capacity. Maybe you’re already producing goods, but you want to increase your output. If you’ve reached the limit of what your current facilities can make, expansion capital can help you build, for example, a second factory. Glasgow-based Walker Precision Engineering, which makes advanced components for the aerospace and defence industries, is one of many firms that have received BGF funding to increase production capacity.
  • Sales and marketing. It may be that you have a great suite of products and services, you just need help raising awareness among potential customers. Expansion capital can fund marketing and help you employ salespeople to get your products into the market. Manchester-based financial technology firm Planixs is one of many businesses that have used BGF funding for sales and marketing.
  • International expansion. If you have grown as much as you can within your home market, it might be time to consider going overseas. Expansion capital can help your business begin operating abroad. Lead generation technology company ROI used BGF funding to expand into 12 cities across the UK and Europe.
  • Succession planning. If the time is right for a major shareholder to depart from the business, expansion capital can be used to help manage the process, ensuring the company still has the finance it needs to grow. Digital agency Kagool is one of many companies that received BGF funding while managing a leadership succession.
  • Acquisition finance. In some cases, the quickest way to grow is by acquiring another company in your sector. Expansion capital can fund an acquisition and also assist with the cost of integrating the business with yours. This method of growth is sometimes called “buy and build”. Landscaping firm TCL Group is one of about 75 companies that has pursued a buy-and-build strategy with BGF funding.

How do I know if I need expansion capital?

These are just some of the most common reasons why business owners choose to seek expansion capital. Depending on the nature of your business, there could be a variety of reasons why you might seek funding to help you grow.

If you’re wondering if expansion capital is for your business, it might be worth considering the ambitions for your business.

  • Do you have goals that cannot be achieved organically – that is to say, by using what you already have, making process improvements and becoming more efficient?
  • Do you have ideas that could increase the turnover or profitability, but which you don’t have the time or resources to pursue?
  • Do you wish to acquire and merge with other companies in your sector but lack the financial firepower that would allow you to afford such acquisitions?

If you answered yes to any of those questions, it may be worth exploring the idea of expansion capital.

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