Financing Options Tech Companies Can Leverage for Growth

Growth funding or growth capital is a type of investment usually through a private equity firm, but sometimes from high net worth individuals in return for an equity stake in potentially high growth unquoted companies. In other words a growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts.

The portfolio mainly consists of companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development (R&D). Most growth funds offer higher potential capital appreciation but usually at above-average risk.

In order to improve the business, increase sales, or expand market penetration, a significant investment is often necessary. Businesses may need financial resources to obtain inventory to fulfill a large order or get new equipment to improve or expand their services. Growth financing is designed to help businesses get to the next level and achieve greater profitability.

Whether your company is a small SaaS startup, a large healthcare company, or something in between, growth is always the goal. In order to make that a reality, businesses look for growth financing, capital specifically directed to aid them in achieving their targets for expansion and reaching the next level of their activity. However, finding growth financing can be a challenge, especially for small and medium- sized enterprises (SMEs).

Larger traditional banks often fail to provide this type of funding for entrepreneurs seeking growth. After the 2008-2009 financial crisis, traditional lenders faced increasing regulatory restrictions, which they have responded to by preferring large, established companies with significant cash flow and a strong debt-to-income ratio. There are, however, viable growth financing opportunities available to SMEs. Alternative lenders, including business development companies (BDCs) such as LiquidityCap, meet the needs of these businesses while providing significant benefits throughout the process.

BDCs offer not only access to growth financing but also flexibility, an easy application process, and a quick turnaround time. Technology financing is particularly appealing to alternative lenders, especially for companies providing Software as a Service (SaaS). That’s because they feature predictable cash flow courtesy of subscription-based, recurring-revenue models, as compared to the physical assets typical of the larger companies favored by traditional lenders. Growth financing can take many forms, from lines of credit extended by a traditional bank to small business loans from the federal government’s Small Business Administration.

Businesses may seek out venture capital or angel investors. All of these can bring in substantial funds, but some of them are challenging to access while others require significant size, time, and documentation to begin. Companies may also use vendor and seller financing, payment plans provided by certain suppliers. In the first of those, companies may offer discounts in exchange for a commitment to purchase a product over the long term. Vendor and seller financing is often widely available, although it can be more expensive than other methods of obtaining financing for inventory expansion or equipment improvement.

In essence, the buyer continues to pay off the seller of a business over time, enabling a transaction to close and the seller to receive ongoing payments. Other options, like debt financing and mezzanine financing are important mechanisms for small and mid-market businesses to access growth financing. These options often bring together aspects of equity and debt financing. Business development companies and other alternative lenders offer high approval rates for these financing options, many of them structured to meet the financial concerns of small and mid-sized businesses.

Non-bank cash flow lending is also known as enterprise value lending. While many traditional lenders like banks rely on tangible assets like equipment or real estate to evaluate a business for potential financing, business development companies offer cash flow lending.

This means of debt financing examines the potential growth of a business to underwrite a loan. This type of debt financing offered by alternative lenders is particularly well-suited to growth financing, as it is based on the evaluation of growth potential. Business development companies also offer flexible payment options alongside professional guidance to help recipients achieve their goals.

Recurring revenue lending is another area of debt financing well-suited to small and medium-sized businesses, especially those with SaaS or other subscription-based, recurring-billing models. These SMEs and startups may not have physical assets to leverage for a loan, but they do have predictable and growing revenue streams. In this form of financing, lenders evaluate a company’s annual recurring revenue (ARR) or monthly recurring revenue (MRR) before giving the green light.

A debenture is a type of debt instrument, like a bond. However, it is not backed by collateral and physical assets, but instead by intangible assets, the company’s reputation, and its performance. Cash flow, credit ratings, and other aspects may be taken into account when creating a debenture.

For companies wanting to take their achievements to the next level, growth financing can provide the resources necessary to make it happen. Alternative lenders offer speed, flexibility, and simple application processes well suited to small and mid-market businesses. When seeking out growth financing, it is important to look for a proven track record of success.