The fundamental differences between working and growth capital
As a company owner or operator, you probably know what capital is. Broken down to the lowest common denominator, capital is money you have available. You use it to fund various business aspects to keep your endeavor afloat.
If you run into capital shortages, you must figure out a way to get past that. Without capital, the whole system breaks down, regardless of which niche you are in or what products you offer.
What some business owners might not necessarily realize is that there is more than one kind of capital. You can divide it up into working and growth capital.
Let’s take a moment to talk about the difference between those two things. We’ll also cover why having one is just as important as having the other.
What is growth capital?
We’ll start with a growth capital definition. Growth capital:
- Is money you need for your business to expand
- Is often speculative money
Let’s say you have a proven business model. You have an eCommerce website, some brick-and-mortar locations, or both.
You know you make products or offer services that people like, and you have the capital to continue providing them. The system perpetuates itself, and it has done so for quite some time.
You might want to expand, though. You have ideas for the future, and you need additional money for that. This is growth capital. It’s money you need to start testing the market to see whether you have viable advancement ideas.
What about working capital?
As for working capital, it is:
- Money you need for proven business commodities
- Funds that you continually recycle back into the system
Your working capital is the money you need to pay for the raw materials to make your products. It’s the funds you require to pay your employees and your various insurance bills. You use it to pay for packaging and product shipping, and marketing as well.
If you have a business website, you need working capital to pay for your site hosting. You use it for commercials, radio spots, social media ad campaigns, or to hire freelancers for various tasks.
Working capital is the lubricant that keeps your business’s machinery running smoothly. When you profit, much of that money goes back into the system as recycled working capital. Hopefully, you’ll have enough left over as the business’s owner to make a comfortable living.
Why do you need both of them?
The reasons why you need working capital should be obvious. Businesses need money to run smoothly. It’s that money that pays for all of the things we just mentioned.
However, as a business owner, if you don’t have growth capital, you’re usually doing yourself a disservice. Growth capital, as the name implies, is what allows you to grow.
If you want to expand into new markets, growth capital lets you do that. If you plan to buy some new brick-and-mortar locations, you can use the money for that. You might purchase the latest technology that will help your business run smoother. Any ambition you have will require growth capital.
The only reason you wouldn’t want to have growth capital is if you’re completely satisfied with the status quo. If you have achieved a perfect equilibrium, and you don’t care about expansion, you might be okay with just working capital.
However, it’s a rare company that does not want to expand at some point. Success often means getting bigger because that gets you more money, fame, acclaim within your niche, industry awards, etc.
How can you get growth capital?
There are different ways you can find growth capital. Ideally, your business model is already producing enough working capital.
As for growth capital, you can always use a financing company. They will probably lend you money for speculative purposes if you can approach them with what seems like a viable business plan.
Keep in mind that if you borrow money from a financing company, you’ll need to pay interest on it. If you want to expand, though, and you feel like you have come up with a sound strategy, you’re probably willing to take that risk.
You can also borrow money from banks or credit unions. It’s essentially the same deal: you get the growth capital you need, and you pay interest if you can’t quickly pay back the principal.
Most companies need both working and growth capital at some juncture, so make sure you pick the lending entity that makes the most sense.
Story by Susan Melony