It has typically been the case that debt funding has not always been freely available to smaller and mid-market tech businesses, and the reasons for this are twofold:
- Quite often, tech businesses have limited tangible assets on their balance sheets as the majority of the value in the business is the intellectual property rather than machinery or buildings;
- Banks do take comfort from businesses generating profits of, say, at least €4m per annum. Fast-growing tech businesses often need debt support ahead of this.
The lack of tangible assets means there is limited security against any loans and so the bank is less likely to recoup its money should the company fail. In addition, many tech businesses require financing to support roll-out at a pre-profit early stage of growth.
The good news
Funding options for tech businesses have significantly improved. There are now a number of alternative lenders which are focussed on – and keen to support – tech businesses, including Ares and TPG, along with specialist banks which have a preference for technology-focussed businesses, such as Silicon Valley Bank and Wells Fargo.
There is also strong evidence to suggest that many traditional commercial banks are aware of the opportunities that are available to support credible and growing tech businesses. This has been evidenced most notably by the establishment of growth finance teams and tech sector teams within a number of the major players. These teams have a greater understanding of the business dynamics of this sector and are comfortable in supporting pre-profit businesses that demonstrate credible business plans for growth.
With the increased number of debt funding options and high level of liquidity in the market, now is a great time for tech businesses to raise finance to support their growth strategies.