This article is sponsored by Bridge Bank
How has recent market volatility affected technology companies?
Access to equity and debt funding has been tightening for the past year, and even more so recently due to the bank failures in the early months of 2023 that put stress on the economy and required some companies to find new banking options. Although the factors leading to the failures of those institutions were unique, tech companies are understandably cautious and thoughtful as they decide whether and where to move their money or obtain funding.
Ultimately, what has always been true is even more essential today: companies that choose stable, well-aligned partners will be stronger. That goes for equity partners, leadership, board members, lenders, bankers, key vendors and others.
For tech companies currently assessing lenders, what questions would you advise they ask before entering into a relationship?
In this climate, experience is a very meaningful factor.
First, I would advise companies to understand the lending institution’s experience and comfort with the venture capital and private equity-backed technology sector and your company’s particular niche.
Second, ask about the background and experience of the specific professionals your company would be working with. Drill down to really get a handle on which individuals would be managing your relationship and how much access you will have to them and the ultimate decision-makers at the lender. Companies can reasonably expect to have a relationship manager they can contact directly to answer questions and respond to needs in real time, yet not all banks offer that.
I would also advise asking how long a potential banking partner has been active in the space and how they have handled previous macro-economic volatility. Also ask how the bank’s leadership team views the tech lending space and how they have demonstrated their support. Banks that have navigated through down cycles can bring a deep understanding of companies’ risks and opportunities – providing invaluable guidance and forging a true partnership during tough times.
Are there still opportunities for technology companies, given the tightening economic environment?
Absolutely. Innovation happens in any economic climate. The beauty of the technology sector is that many of these companies address problems that are especially pressing during downturns or are truly evergreen. We’ve seen many tech companies thrive in a recessionary market – which, by the way, is not assured to occur, although caution is merited. Experienced tech lenders can evaluate a specific company’s outlook and opportunities to assess the best approach to debt and credit facilities in the current climate.
How do you expect rising interest rates to affect technology companies in the medium and long term?
The impact of rising interest rates will be felt most acutely among less-established companies that anticipated relying heavily on debt to propel growth. The landscape has changed quite notably in the past 24 months, meaning that founders who laid the groundwork for growth not long ago are operating in a very different environment.
Common wisdom says that tech stocks will not rebound until the Federal Reserve stops raising interest rates, but of course, the Fed is committed to its path to a 2 percent inflation target. With less funding in this climate, reduced burn and a path to profitability are integral to growth, but it can be tougher for startups and early-stage companies to find the runway they need.
In the long term, higher interest rates can pose a threat to innovation because they challenge tech companies to get to break-even or profitability sooner. However, I’ve seen companies emerge stronger and more resilient.
This is another area where an experienced bank can be a valuable tool. Banks that understand the tech sector know how essential the startup phase is. They can help founders lay the groundwork for future growth from the beginning, with solutions designed to be accessible in the initial stages and then evolve to meet changing needs without requiring a move to a different institution.
What options are available today for tech companies to access credit facilities?
Lenders approach underwriting more conservatively in a more volatile, rising interest rate environment. But good business models with supportive investors have options for working capital and growth capital credit facilities.
The specific opportunities depend on the individual company, but tools may include recurring revenue lines of credit, which provide for borrowing availability based on a multiple of monthly recurring revenue to supplement working capital needs. Businesses with accounts receivable or inventory may access asset-based lending, and growing companies may have other financing options for venture debt or growth capital to enter new markets, finance an acquisition or to purchase equipment.
Is VC financing still available, and how can a bank help with PE funding?
Venture capital and funds remain active for equity investment opportunities, but they have become more judicious. Banks with substantial experience in the tech sector work with VCs to provide working capital lines of credit, venture debt and growth capital to supplement the equity financing. Given the changes in the tech market over the past year, banks are operating with a higher level of caution right now, meaning they will evaluate opportunities more thoroughly and consider full-banking relationships more favorably when looking at prospective relationships.
Banks may also offer structured finance options to companies with private equity sponsors to offer flexible financing solutions for the life of an asset, from term debt for acquisitions and recapitalizations to working capital to support growth. Companies will want to seek out a bank with expertise in enterprise recurring and transactional re-occurring revenue-based debt structures, as well as traditional cashflow-based lending structures.
One other option is syndicated loans, which play a role when the borrower requires a loan that is too large for a single lender, or a project needs a lender with expertise in a specific asset class. Companies will want to work with a bank with the expertise and capabilities to partner with other lenders to syndicate larger loans and help facilitate clients’ goals.
That is all to say that even in a tighter market like the one we are experiencing, there are options available. We cannot say it often enough – it is all about communication and mutual understanding, which is why solid and lasting relationships with our tech clients are incredibly valuable.