The UK tech sector is vital to UK jobs and growth. It contributes around £150bn to the economy and employs 2.9m. Many small but growing tech firms are playing a vital role in the economic recovery from Covid-19.
But the sector’s small and medium-sized firms can’t always access the finance they need. We talk to Dominic Buch, co-founder of SME alternative credit specialist, Caple, about how tech firms can access the finance they need to grow.
1. Why do tech SMEs struggle to access finance when the sector often attracts a lot of funding?
Very often venture capital funders tend to focus on equity capital funding for early-stage starts-ups. While these types of firms often grab the headlines, they only represent a fraction of the sector.
When you look at the amount of venture capital that goes to UK tech firms, around £10bn in 2019, many might argue that the sector gets all the funding it needs.
But behind the headline-grabbing figures, many small and medium-sized tech firms, the backbone of the sector and to the economic recovery from Covid-19, struggle to access suitable finance to grow.
2. Why can’t tech SMEs access funding from their bank?
Many small and medium-sized tech firms find it difficult to access lending from their bank because banks want physical security for their loans. A bank will want to lend against tangible assets in a business, such as property or machinery. As a result, secured lending is only available to businesses with collateral.
Yet, many successful tech businesses are growing by developing intangible assets such as intellectual property, data, or networks. These tech SMEs can therefore quickly reach the limit of bank finance. Where a physical asset isn’t available, a bank or funder may ask the owner to agree to a personal guarantee, perhaps jeopardizing their home.
These personal guarantees can be as high as 20 percent to 30 percent of the loan value. If a firm is borrowing £1m or more, you can understand why the owner might not want that personal risk. So, the next option might be to consider equity funding. But this isn’t right for every business.
3. Why isn’t equity funding suitable for tech SMEs?
Equity funding has many benefits. It may provide the funding a business needs to grow and in some instances brings intangible benefits such as the investor’s sector experience. But third-party investment does not suit every business or owner-manager. It puts pressure on the business and the owner to perform to certain targets. It reduces their control and can make them less nimble.
Equity funding also dilutes ownership immediately and over the longer term it dilutes the reward if the business is sold. In addition, many business owners do not want the additional controls and restrictions on their business that comes with equity funding. So, understandably, many owner-managers 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. The lack of genuinely unsecured lending is a critical barrier to growth for SMEs in the sector.
4. So, what funding do small and medium sized tech firms need?
Many growing SMEs need unsecured lending to grow, often in loan sizes of £500,000 to £5m. The businesses looking for loans of this size are often too big for peer-to-peer platforms and usually too small for specialist banks and debt funds.
Many are established, profitable and cash generative businesses but they have very few or no tangible assets to offer to lenders as security.
5. How does Caple help?
We are the UK’s first firm to offer access to long-term genuinely unsecured funding of up to £5m based on the future cash flows of the SME. We require no collateral or personal guarantees as security.
The 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.
6. How does it work?
Our technology platform supports a network of accountants and financial advisors to SMEs. Those accountants or advisors identify suitable borrowers and prepare the loan application materials. This enables an efficient and robust credit process and helps the business through the process.
7. Who have you helped?
We’ve helped a number of innovative and ambitious UK tech firms. For instance, we helped Cloudbooking, a cloud-based room, desk and visitor booking software firm, to access multimillion-pound unsecured funding, contributing to an estimated 50 percent growth for Cloudbooking.
Cloudbooking is using the funding to meet increased global customer demand following Covid-19. The company is scaling its global operations and workplace management software platform to deliver new hybrid ways of working post-Covid-19. We’ve also helped 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.
8. Why is unsecured lending so important for tech firms?
Genuinely unsecured lending is important for two reasons. The first is that it provides the funding that firms need to plan, grow and invest. Second, genuinely unsecured lending enables business owners to keep control of their business. Both in terms of their ownership and equity. 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 and losing control.
Dominic Buch, co-founder and managing partner, Caple