Debt finance and technology companies: Insights from industry insiders
INSIGHT ARTICLE |
Debt finance structuring in technology companies was the topic of discussion at RSM’s Boston Tech Connection recently. The event, co-sponsored by Square 1 Bank, a division of Pacific Western Bank, featured panelists from the banking and venture debt lending industries as well as a technology industry chief financial officer (CFO). Key takeaways from the event included the following.
- Align with business growth
Similar to the dot-com days, capital is currently plentiful for growing technology companies, providing businesses various financing strategies to leverage, including bank and venture debt. However, there are important considerations each company should weigh before taking on venture debt, including whether the funding is aligned with business growth projections, enterprise valuation and more. Additional capital for the business can be a positive, but if company growth stalls, that bank and venture debt can be an overwhelming financial burden for the business, and unlike equity debt, it needs to be repaid.
- Another wallet on the table
Venture lending and traditional bank financing are not expressly exclusive in the debt structuring space. Rather, venture lending considers any related bank debt as complementary and “another wallet on the table” as one panelist stated. However, venture debt lending sometimes does offer businesses more flexibility as they are not regulated like their banking counterparts, and can take on more of the business’ risk. This also means, though, that often venture debt lending is more expensive to companies than traditional bank financing, factoring in and including warrant coverage.
- The right mix
For many technology businesses, securing an appropriate mix of private investors, bank lending and venture debt is the ideal structure from a financing perspective, but it can differ with each company depending on the type of business (i.e., software as a service vs. robotics or 3D printing), future scalability and expected growth trajectory. Many technology businesses have cash as their major asset; however, some, like a 3D printing company may have real inventory as part of their assets. Some lenders might be cautious about taking on the risk of those companies with large inventory builds, while some may not. Partnering with the right lender for the specific type of business is key here, and networking with other company CFOs is also important.
- Healthy capitalization structure
Bank and venture debt lenders look for technology companies to demonstrate a healthy capitalization structure, which not only includes equity, but also debt. In addition, receiving a Series B or C venture round also signals to lenders the business has a solid management foundation in place and has the expectation of growing significantly. Lastly, businesses with a repeatable process or product with market momentum behind the enterprise can be attractive to would-be lenders.
Questions to consider
The right leverage and debt structuring can give technology companies like yours the boost and critical mass you need to advance to the next level. At the same time, banks and venture lenders are looking for potential and a company that offers a product or service that has garnered some commercial success and could become a significant enterprise. When it’s right, it can be a win-win relationship for both business and lender, but timing is everything.
How can you ensure it’s the right time and your business is at the right stage for venture lending? Consider some key questions:
- Are your business processes, products, people and services scaled for growth?
- Have you assessed your business finance processes and determined gaps, needs and improvement areas? People, processes and systems will be reviewed by any debt lender.
- Have you completed due diligence to maximize business value?
- Have you achieved a Series B or C funding round?
- What are your anticipated future needs related to production, innovation, structure and expansion?
- Whom do you trust? Make sure to talk to other business executives about their experiences with lenders you are considering.
Weighing these questions and understanding where your business may fall will help you select the right financing options for your specific technology business and growth stage.
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