SPECIALTY FINANCE
JOHN HOESLEY Head , Sterling ’ s Innovation Finance Group
FINANCING INNOVATION
Less- or non-dilutive bank debt alternatives do exist for mid-market technology firms … but there are considerations that should be taken before pursuing them . Hoesley breaks down what founders need to know .
KEY CONSIDERATIONS FOR TECHNOLOGY FIRMS TAKING ON BANK DEBT
CHOOSE YOUR BANK WISELY . Founders often work with larger , less-focused financial institutions , mainly because they ’ ve ‘ always banked there .’ These founders often face a harsh reality : their day-to-day banks don ’ t actually understand their businesses or , worse , the unique and rapidlyevolving dynamics of the technology sector .
When assessing your banking partner , it is important to look at their lending habits objectively . Are they quick to issue loans only to have knee-jerk responses to the inevitable speed bumps in a firm ’ s path ? Look for banks whose underwriting is mapped primarily to business risk ( whether investors are involved or not ), which affords a better understanding of firms ’ unique management , model , and markets . Armed with that knowledge , these banks are better able to respond to changes impacting the firm and identify opportunities and anticipate challenges in the market as a whole .
MATCH SOLUTIONS TO WHERE YOU ARE TODAY . While there are rarely ‘ one size fits all ’ solutions , firms should look for banking partners offering credit solutions across all stages of business development :
� VENTURE DEBT . For early-stage firms , venture debt typically follows and supplements equity rounds by adding debt equal to 25-50 % of the raise . The debt also may offer a 6-24 month “ interest-only ” period that allows firms to continue maximizing internal investment by deferring principal amortization .
� RECURRING REVENUE-BASED SOLUTIONS . For mid-stage technology firms with subscription or highly-repeatable revenue ( such as SaaS companies ), recurring revenue-based lines of credit provide acquisition financing and growth working capital to support business investment .
� ASSET-BASED LENDING . Mid-stage firms with service-intensive models may explore asset-based financing to support working capital requirements . With advance rates typically up to 90 % of eligible accounts receivable and 50 % of eligible inventory , firms can leverage existing asset bases to provide required working capital .
� LEVERAGED LENDING . Finally , late-stage firms with positive EBITDA may explore traditional leveraged solutions for organic investment , acquisitions , recapitalizations , and management or leveraged buyouts .
ASSUME NOTHING . The timing of bank debt availability is often misunderstood . Founders often assume bank debt is not available to firms with negative free cash flow , or absent significant asset bases or investor support . The truth is , by understanding the firm ’ s business model — and the fact that growth investments often consume cash but drive enterprise value — experienced technology lenders can often underwrite to firms with so-called “ cash burn ” profiles in cases where gross and net retention , LTV / CAC , and unit economics are strong .
Sterling ’ s Innovation Finance Group provides a full suite of lending and banking products to growing technology companies across all stages of development . To learn more , visit snb . com / innovation-finance .
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