Growth without giving up equity
Dominic Buch, co-founder and managing partner at Caple, looks into finance options for the technology industry.
Before the pandemic, the technology sector grew six times faster than any other industry, according to UK tech network Tech Nation. In 2019, UK-based tech firms secured £10.1bn in venture capital funding. This is more than both Germany (£5.4bn) and France (£3.4bn) combined.
But behind these headline-grabbing figures, many small and medium-sized tech firms, which will be the backbone of the UK economic recovery to Covid-19, struggle to access suitable finance to grow.
So, rather than just looking at equity funding, they need alternative sources of finance that reflect the intangible nature of their businesses.
Finding the right finance
One of the issues with funding for SME tech businesses is that funders, and often the media, tend to focus only on early-stage starts-ups.
But these numbers mask the issue that while venture capital equity funding might be right for high-growth start-ups, for other tech SMEs it is not the best route.
Part of the funding challenge is that many small and medium-sized tech firms find it difficult to get loans from their bank.
Banks prefer to lend to businesses with collateral, usually tangible assets such as property or machinery. As a result, the availability of secured lending is limited by the availability of collateral within a business.
However, many successful tech businesses are growing by developing intangible assets such as intellectual property, data, or networks.
Tech SMEs can therefore quickly reach the limit of bank finance. It is at this point where many tech business owners face a painful choice. They must consider issuing equity to raise funds or agree to personal guarantees, perhaps putting their homes at risk.
The issue with equity funding
The benefits of equity funding are that the investor assumes greater risk. If the business fails, the owner does not have to pay back an equity investor.
Third-party investment does not suit every sector, business or owner-manager. It also dilutes ownership immediately and over the longer term it dilutes the reward if the business is sold.
What’s more, many business owners do not want the additional controls and restrictions that often comes with equity funding. Put simply, they do not feel they need someone else telling them what to do.
As a result, many SME business owners do not want to issue equity in their business to fund growth.
Instead, they would prefer to raise money through long-term debt if they could.
So, the lack of access to genuinely unsecured lending, is a critical barrier to growth for SMEs in the sector.
What funding do tech SMEs need?
Many growing SMEs need unsecured lending to grow, often in loan sizes of £500,000 to £5m.
At Caple, we were the first in the UK to offer long-term, genuinely unsecured lending. We base this on the future cash flows of the SME. We do not require collateral or personal guarantees as security.
Our loans also work alongside existing bank lending or invoice discounting. This means firms can have access to more funding overall than they would get from their bank alone, while also maintaining their existing bank relationship.
Unsecured lending in action
The tech sector has an appetite for unsecured lending. We have completed several deals with innovative UK tech firms.
We recently helped Cloudbooking, a cloud-based room, desk and visitor booking software firm, to access multimillion-pound unsecured funding, contributing to an estimated 50% growth for Cloudbooking.
Cloudbooking will use the funding to meet increased global customer demand following Covid-19.
As Gerry Brennan, CEO and founder of Cloudbooking, summarised: “We’re excited to have Caple supporting us in our strategic global vision as we continue our rapid growth and push on with our product roadmap and expansion plans.”
Earlier in the year we also supported iPLATO, the UK health tech company, to access a multimillion-pound eight-year unsecured loan.
iPLATO, which simplifies access to healthcare for millions of people with its “myGP” platform and app, will use the loan to invest in its technology and marketing.
This will enable it to grow in the UK and to launch internationally. The business will also develop new products and services to enhance the experience for patients, doctors and the NHS.
In all of our deals, business owners are keen to access funding to drive the growth of their business. But they want to do so in a way that means they retain control.
When small but growing tech firms contribute so much to the UK economy, we need to help them secure the finance they need to scale-up. We can do this without pushing them towards diluting equity.
