Cross-Border Lending: Does your bank understand tech companies?

Does your bank understand tech companies?

By James Cunnah, Wells Fargo Capital Finance Technology Finance UK and Matt Maclay, Wells Fargo Capital Finance, Technology Finance

For software firms, access to capital can depend on experienced lenders who see value beyond traditional financial metrics

When Ocuco Limited was ready to expand, CEO Leo MacCanna reached out to secure financing. What he encountered is typical for many software companies and private equity (PE) investors in the technology sector: not all lenders are created equal.

To move forward his company, which supplies proprietary software to optometrists, retail clinics, and vision labs, MacCanna needed a lender that understood how tech firms operate, was experienced in European and U.S. markets, and had the capacity to fund significant future growth. Uncovering all three in a single financial institution required lengthy due diligence; MacCanna’s search lasted over a year, until he finally reached out to Wells Fargo.

Within a few short weeks, Wells Fargo provided a 23 million Euro senior secured credit facility to help the Irish company make an acquisition and grow globally. The bank’s 20-year track-record with technology firms, including those in Europe, made it easy to recognize the value of Ocuco’s platform. It also streamlined the financing process and gave MacCanna both the funds—and the confidence—he needed.

“The [Wells Fargo technology finance] team’s experience and knowledge of the software industry was evident, and translated into an ability to close the transaction quickly and effectively,” MacCanna said.

Traditional measures not always effective with tech firms

Not all tech firms succeed that easily. Even with strong organic growth and significant M&A opportunities, many companies (and their investment partners) struggle to obtain the necessary financing to fuel growth, fund innovation, or expand globally.

Inexperienced lenders, for example, may balk at the negative cash flow and lack of hard assets that growing software and tech firms exhibit. Others lack the international reach and cultural expertise required in today’s global marketplace. Smaller financial institutions may have capital for an initial deal, but be unable to sustain a long-term relationship as the tech firm scales. Others struggle with the demanding expectations of PE investors.

When financial institutions do look beyond traditional measures, tech companies exhibit many valuable characteristics:

  • Mission-critical products that engage users, boost productivity, and reduce costs.
  • Innovative intellectual property (IP) that provides a marketable competitive advantage.
  • Software-as-a-service (SaaS) models that deploy easily and scale rapidly.
  • Longstanding customer relationships that produce strong recurring revenue, predictable forecasts with low volatility, and ongoing upsell opportunities.

Unfortunately, too many mainstream lenders miss these important signals.

Five questions for tech companies to ask potential lenders

Vetting a potential lender upfront can help software and tech companies streamline the process of obtaining capital. Use these five questions to assess the fit of your potential lender:

  1. How long have you provided capital to software and technology companies and PE investors?
  2. Do you have a dedicated technology practice?
  3. What is your global footprint?
  4. What criteria do you use to evaluate the credit-worthiness of technology firms?
  5. What is your average loan size and maximum holding capacity with technology companies?

Ultimately, tech companies and PE investors should identify a lender that will evaluate credit-worthiness on tech-specific variables, and have the capacity to support future growth opportunities worldwide. MacCanna believes Ocuco made a smart decision with Wells Fargo that supports their current and long-term goals.

“The finance package not only covered the basic requirements we needed to execute the acquisition we were working on, but also anticipated our future needs so that we would have funding in place to grow the business,” he said.