Your business is doing well: your product or service has proven itself, customers are satisfied, and revenue is growing. That’s when a new growth opportunity often arises.
Perhaps you want to enter a new market, build additional commercial clout, or invest in product development. Your current cash flow supports day-to-day operations but is insufficient to fuel the desired growth. You need additional capital.
Many entrepreneurs immediately think of bringing in an investor. That makes sense, but ultimately it’s not always the most attractive route.
What does growth capital really cost?
When it comes to financing, the focus is often on visible costs such as interest. As a result, bringing in an investor sometimes seems more attractive than taking out a bank loan. But the true costs of equity capital are less visible. And what about indirect costs such as processing time, control, and future value?
Suppose you raise €1 million at a company valuation of €4 million. An investor would then receive 20% of the shares. If your company grows to a valuation of €20 million in five years, that stake would be worth €4 million.
That doesn’t mean equity capital is a bad thing, but it is important to weigh the pros and cons. After all, raising capital also means sharing future value and control.
Bank financing: low-cost capital, full control
For businesses with a proven track record, a bank loan is often the first option. The biggest advantage is clear: you retain all your shares and, with them, full control.
In addition, financing costs are generally lower than the returns investors expect. The downside is that banks primarily focus on repayment capacity and collateral. A bank wants assurance that interest and principal payments can be met. When growth ambitions exceed current financing capacity, there is often a lack of sufficient repayment capacity and collateral.
When there isn’t enough collateral, BMKB financing can offer a solution. Under this program, the government partially guarantees the loan, which sometimes makes financing possible after all.
The middle ground: a convertible loan
Not every company with growth ambitions meets a bank’s lending criteria. At the same time, it’s sometimes too early to sell shares right away. A convertible loan can be an attractive solution in such cases. An investor first provides a loan that can later be converted into shares.
The advantage is that a valuation does not have to be determined immediately. If the growth plans are successfully implemented, conversion can take place at a higher enterprise value, thereby limiting dilution. However, clear agreements are needed regarding interest rates, the term, and the conditions under which conversion will take place.
More Than Just Money
The difference between a bank and an investor isn’t just about the costs. A bank wants to receive interest and principal payments. An investor becomes a co-owner and will typically want to be involved in important strategic decisions. Moreover, a sale process often takes more time due to negotiations, valuation discussions, and due diligence. Therefore, don’t just look at the amount of capital, but also at the impact on the company and the entrepreneur. An investor brings not only capital but also relevant expertise, a network, and a long-term perspective. In addition, an investor can provide room for additional investments at a later stage.
The best solution is often a combination
In practice, the optimal financing structure rarely consists of a single component. Often, part of the financing comes from a bank, possibly supplemented by a convertible loan or equity capital. This allows you to raise sufficient capital while limiting the dilution of shares.
As corporate finance advisers, we help entrepreneurs analyze scenarios, financing structures, and negotiations with banks and investors.
Ultimately, a financing process isn’t about raising as much money as possible. It’s about attracting capital on terms that suit the company and its ambitions.
