Growth finance for business expansion

Growth finance is borrowing that funds a specific expansion plan, repaid over a medium term from the extra profit the plan is expected to create. Lenders judge it on your company's track record and on whether the plan's numbers stand up.

A typical growth finance process runs as follows:

1. Define the plan. Set out what the money is for, what it costs, when it will be spent and when the investment should start to pay back.
2. Build the numbers. Prepare a cash flow forecast showing current trading, the investment, the new repayments and the expected extra income, ideally with a cautious case as well as an expected one.
3. Initial lender review. A lender reviews your accounts, management accounts and plan, and may give indicative terms covering amount, term, pricing and security.
4. Credit approval. The lender's credit team assesses the full application. For larger facilities it may want a call or meeting with the directors and further questions on the forecasts.
5. Facility letter and security. The lender issues a facility agreement setting out conditions and covenants, and any security such as a debenture or personal guarantees.
6. Conditions met and drawdown. Once documents are signed and conditions satisfied, funds are released in one sum or in stages.
7. Reporting and repayment. Your company repays over the term and, on larger facilities, may need to send the lender regular management accounts and covenant figures.

Growth finance does not have to be a single loan. Many expansion plans are funded more efficiently by matching each part of the spend to the type of finance that suits it.

• Term loan for the core investment: a fixed amount repaid over one to five years, used for costs that do not have a separate security value, such as hiring, marketing or fit-out.
• Initial capital repayment holiday: some lenders allow interest-only payments for the first months while the investment starts to earn, then full repayments afterwards.
• Asset finance for equipment and vehicles: often better funded through asset finance, with the assets as security, leaving the growth loan for everything else.
• Invoice finance for the extra working capital: as sales grow, more cash is tied up in unpaid invoices. Invoice finance can release it and grows with turnover.
• A revolving facility for flexibility: a revolving credit facility can cover timing gaps in the plan without borrowing the full amount from day one.

Where more than one lender is involved, they may need to agree how security is shared between them. This is common and your relationship manager can explain what each lender will ask for.

The cost of growth finance is the interest plus every fee over the life of the facility. Compare offers on total cost of credit across the full term, not just the headline rate.

• Interest: fixed or variable. Variable rates are often linked to the Bank of England base rate plus a margin, so repayments can change.
• Arrangement fee: usually a percentage of the facility, often deducted from the funds or added to the loan.
• Legal and valuation costs: on secured facilities, your company may pay its own and sometimes the lender's legal fees.
• Monitoring or renewal fees: on some larger or revolving facilities.
• Early repayment charges: some loans charge for repaying within a set period.
• Non-utilisation fees: on staged or revolving facilities, a charge on money available but not drawn may apply.

Lenders price growth finance on the company's profitability and cash flow, the strength of the plan, the term, the security offered, existing borrowing and the directors' track record. A well-evidenced plan from a consistently profitable company usually attracts better terms than a stretched one.

Illustrative example only: actual costs depend on the lender and your circumstances.

A wholesale company borrows £300,000 to open a second distribution site, repaid monthly over five years at an illustrative fixed rate of 10% a year with a 2% arrangement fee.

• Monthly repayment: about £6,374
• Total repaid over 60 months: about £382,447
• Total interest: about £82,447
• Arrangement fee: £300,000 × 2% = £6,000
• Total cost of credit: about £88,447
• Annual repayments: about £76,489

If the company's EBITDA (earnings before interest, tax, depreciation and amortisation) is £250,000 and it already pays £60,000 a year on other borrowing, total annual debt payments would be about £136,489. That gives debt service cover of about 1.83 times (£250,000 ÷ £136,489). Our DSCR calculator works this out for your own figures.

Lenders size growth finance mainly on how comfortably your company's existing profits can cover the new repayments, with the projected growth seen as a bonus rather than relied on. Security and existing borrowing then shape the final amount.

Common measures include debt service cover, which compares cash profit with total annual repayments, and total borrowing as a multiple of EBITDA. Each lender sets its own limits and many want a comfortable margin above one times cover. Unsecured growth finance is usually more limited in size than facilities backed by a debenture or specific assets.

Growth facilities often run for years and carry conditions that affect how your company operates, so read the facility letter as carefully as the pricing.

• Covenants: financial tests, such as minimum debt service cover or maximum borrowing levels, checked against your accounts. Breaching them can let the lender demand repayment or reprice.
• Information requirements: how often you must provide management accounts and what happens if they are late.
• Security: what a debenture covers and how it affects future borrowing from other lenders.
• Personal guarantees: whether they are limited or unlimited and when they could be released. See our guide to personal guarantees.
• Events of default: besides missed payments, these can include a change of control or another lender taking action.
• Early repayment and refinancing: what it costs to repay or move the facility if your plans change.

Stress-test the plan too. If sales take twice as long to arrive as expected, check the repayments can still be met from existing trade.

Growth finance suits a planned, one-off investment with a clear payback. Other products can be a better fit for specific needs.

• Acquisition finance: better for buying another company, where the target's assets and cash flow form part of the security and structure.
• Asset finance: better when the growth is mostly equipment or vehicles that can secure the borrowing.
• Invoice finance: better when the main pressure is working capital from rising sales on credit terms.
• Equity investment: brings in money without repayments, but you give up a share of the company. Growth finance is debt, so existing owners keep their shareholding.

It is harder, because growth finance relies heavily on track record and proven profits. Some lenders will look at a company with a past credit issue or recent dip in profits if there is a clear explanation and strong current trading, but many will decline.

Lenders set their own minimum trading periods and turnover requirements, and for growth finance many prefer two years of filed accounts. A company with a shorter history may find asset finance or invoice finance more accessible for parts of its plan, because those are secured on specific assets or invoices.

Growth finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated. Consumer Credit Act protections generally do not apply, so the facility agreement and any guarantees set out your company's and directors' rights.

Take legal and accounting advice before signing, particularly on covenants, security and guarantees. Welcome Finance is not authorised or regulated by the FCA and arranges unregulated business finance only. Our guide to regulated and unregulated business finance explains more.

We are a commercial finance broker, not a lender. Your dedicated relationship manager, a real person available by phone, email and chat, helps present your plan clearly and stays with you from first enquiry until the lender releases the funds.

1. Complete our 60-second eligibility check, which does not affect your credit score.
2. Your relationship manager discusses the plan, the amount and how it should be structured, and tells you which documents lenders are likely to ask for.
3. We approach suitable lenders on our panel. They run their own credit checks once you decide to apply.
4. We help you compare offers on total cost, security, covenants and flexibility.
5. Once conditions are met and documents signed, the lender releases the funds.

We charge no fee to your company. We are paid a commission by the lender when the finance completes. You can ask how much it is, and it can differ between lenders. Read more about how we are paid.

What should a growth plan include for lenders?

A short summary of the opportunity, the costs, the timetable, the expected extra sales and profit, the people delivering it and a cash flow forecast. Lenders also value a realistic view of what could go wrong.

Is a fixed or variable rate better for growth finance?

A fixed rate gives certainty while the plan beds in. A variable rate can fall as well as rise. The right choice depends on how much repayment uncertainty your company can absorb.

What is a debenture?

It is security over a company's assets, usually a mix of fixed and floating charges, registered at Companies House. It gives the lender a priority claim on those assets if the company fails.

What are financial covenants?

They are tests in the facility agreement, such as minimum profit cover for repayments, that your company must meet throughout the term. Lenders usually check them using your management accounts.

Can growth finance pay for hiring staff?

Yes. Hiring is a common use. Lenders will want to see when new staff should start to generate income and how payroll is covered until then.

How long does growth finance take to arrange?

Simpler unsecured facilities can move quickly once documents are ready. Larger secured facilities take longer because of legal work and any valuations.

Can we have growth finance alongside existing borrowing?

Often, yes, if total repayments remain affordable. Existing lenders with security may need to consent or agree how security is shared.

Do lenders want directors to invest too?

Some lenders like to see owners committing their own money to the plan, particularly for larger or riskier projects. It is not always required.