What are growth loans and how they help businesses scale up

After years of hard work, a high-growth company has tested its business model and taken the leap to scaleup status. Its roadmap now includes new objectives, such as growing in different markets, diversifying its product portfolio and reaching new customers. This requires companies to seek more financing than was needed in previous phases. Enter growth loans, an alternative financing solution to help startups or scaleups take their business to the next level.

Characteristics of growth loans

Basically, growth loans are a type of loan for companies that have a mature, profitable business with high-growth prospects.

With this type of loan, shareholders can maintain control over the business without diluting their equity stake (a phenomenon that occurs when new investors or former partners participate in capital increase rounds and their equity in the company is reduced). This means that there is no change of control over the company or its ownership, and management can continue to operate independently.

This financing formula has gained ground in recent years, particularly in advanced rounds, as a way to supplement corporate financing. However, there are specific conditions attached to gaining access to this solution, based on criteria like the financial performance of previous years and operating history.

Another feature of this financing alternative is that it includes an advisory component that is provided by experts and professionals. These professionals offer the help high-growth companies need when developing their expansion strategies and provide access to new networks of contacts. BBVA Spark is a prime example of this and offers growth loans backed by specialists who understand the nature of the business and provide expert advice.

Difference between growth loans and venture capital

Beyond these benefits, these loans differ from venture capital in several ways. These unique features make it an option that supplements venture capital and one to be considered by those entrepreneurs who are in an excellent position to boost their business:

1. Company phase. Growth loans are geared towards mature companies, while venture capital is used for earlier stages and for businesses that, in principle, have a high growth potential.
2. Avoid dilution. With this type of loan, the lenders that provide the requested capital do not acquire shares in the company, while venture capital involves a greater dilution of the company’s founders’ shares.

What are the similarities and differences between growth loans and venture debt?

Through BBVA Spark, entrepreneurs have the opportunity to tap into both these types of loans as well as financing solutions like venture debt. There are, however, some similarities and differences between these tools.

Similarities include the fact that both forms of financing allow entrepreneurs to retain control over their business and provide an injection of liquidity to finance their new projects. However, here is where the first difference comes in. While founders’ shares are diluted in venture debt (although to a lesser extent than in venture capital, since debt is combined with the acquisition of a small fraction of the company’s shares), growth loans (because they’re loans) allow founders to keep their equity.

On the other hand, venture debt financing has emerged as an alternative for companies at the seed or early stage of growth, while growth loans are focused on supporting companies at a later stage of expansion.

What purpose does this financing alternative for high-growth companies serve?

Unlike other methods for financing high-growth companies, growth loans serve a number of common purposes:

• Company internationalisation. As they evolve, high-growth companies look to explore other markets. Growth loans enable these types of businesses to raise sufficient liquidity to enter other regions and launch their operations.
• Attracting new talent and top professionals. As companies grow, attracting new professionals that support their business strategy becomes crucial. This type of loan is a way for startups to boost the capacity of their workforce with new hires, like executives.
• Launching new products. To accelerate their growth, companies choose to bring new products to market or make a major upgrade to what they have to offer.
• Integrating new technologies. For companies, having access to growth loans opens the door to implementing new technologies that boost both process efficiency and their competitiveness.
• Mergers and acquisitions (M&A) of other companies. Whether it’s to grow the value of the business, integrate new technology or boost a product, acquiring other companies is an avenue for growth for companies that want to scale. This type of loan provides the support they need to do just that.

Evolving is part of every company’s roadmap, even in those phases when it has managed to prove that its business model is viable and financially stable. Fortunately, solutions like growth loans open the doors for entrepreneurs to scale up their business, turning growth into their own paradigm.