Tech firms are at the heart of the UK economy, underpinning many other sectors including manufacturing, finance, marketing and healthcare. We have the third-largest digital technology sector in the world, generating £184bn in turnover in 2018, according to government statistics.
Thousands small- and medium-sized businesses contribute to that sector, developing state-of-art capabilities and innovations that help other firms and industries grow. Yet despite all they do to help others, some of these small and ambitious firms find it difficult to access the right growth finance.
What’s the issue?
Based on the amount of funding that goes to some tech firms, some commentators might argue that the tech sector attracts all the funding it needs. Certainly, this may seem true when considering that venture capital investment in the UK sector reached £6.3bn in 2018, more than any other European country.
But, while such third-party equity funding might be right for many start-ups and scale-ups, for other tech SMEs it is not the best route. Part of the challenge is that many of these firms find it difficult to access lending from their bank.This is because banks prefer to lend against 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 have to consider issuing equity to raise funds or agree to personal guarantees.
But very often business owners do not want to issue equity and dilute ownership 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’s the solution?
Many growing SMEs need this unsecured lending to grow, often in loan sizes of £500,000 to £5m. The businesses looking for loans of this size are too big for peer-to-peer platforms and usually too small for specialist banks and debt funds. They are profitable and cash generative but have no hard assets to offer to lenders as security.
Caple is the first in the UK to offer long-term, fully-unsecured lending, based on the future cash flows of the SME. We do not require 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, while also maintaining their existing bank relationship.
How do we help?
Proving the appetite for unsecured lending in the tech sector, we have recently completed several deals with innovative UK firms.
For instance, we recently 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.
As Martin Rowden, CFO of iPLATO, summarised: “We aim to transform healthcare by making it easier for patients to better organise their and their family’s healthcare. To do so, we need funding that reflects our ambitions. While equity funding was a possible option, it was expensive, failed to match our vision, and we did not want to dilute our ownership.”
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 and losing control.