Tech sector finance montage

Lack of loan finance mustn’t stall tech sector growth

Image credit: Dreamstime/Violetkaipa

Lenders’ fear of risk is threatening the growth of businesses that have received a boost from the Covid-19 lockdown.

With lender confidence already at a low ebb, another UK national lockdown in conjunction with the end of the Brexit transition period has created a perfect storm for the business-lending marketplace. For tech companies, this could mean that 2021 is a year when business plans are put on hold.

It is well known that economic or political uncertainty is off-putting to lenders of all kinds. From family offices to high street banks, many are now taking a ‘risk-off’ view to lending, whether it be personal or commercial. The sheer volume of lending activity that has taken place by necessity during the pandemic in the form of Coronavirus Business Interruption Loans (CBILS) and Bounce Back Loans (BBLS) has scaled-back appetite further, making loan finance even harder to come by. 

With home technology in the spotlight during the pandemic, as remote workers adopted cloud-based communications platforms and furloughed workers chose to use some of their spare time shopping, training or investing online, the tech sector has continued to attract investor attention. However, concern is growing that with loan finance in short supply, some early-stage businesses may lack the funding needed to scale their activities.

The success of London as a thriving tech and finance hub has helped to cushion the sector from the effects of the pandemic to some extent. In recent months, banks and private equity firms have shown considerable support to their customers in the sector by making sure that access to capital remains open. While some banks choose not to lend to tech start-ups or seed businesses, those that do could find that, although the potential risks are higher, the growth prospects and returns could be too.

While more established tech companies are shoring up their portfolios and streamlining existing assets, others are facing more significant challenges. Start-ups seeking initial seed funding and growing SMEs requiring venture capital are finding it difficult to access the finance they need. With both debt and equity investors sharing the same ‘risk off’ approach, there is a risk that those seeking funding are left to sink or swim.

Despite the impact of the pandemic, there have been a number of examples of equity and debt being raised successfully in the last few months. Tech entrepreneurs and business owners should bear in mind that lender appetite for low-risk businesses with good growth prospects is likely to remain strong through 2021. Having a clear understanding of what the business is aiming to achieve from securing the capital and agreeing red lines with shareholders and management team is an important starting point for finance seekers. Alternative sources of funding should also be considered, although crowdfunding platforms are not accessible to all types of business and can be expensive.

Raising loan finance is never easy at the best of times; when in short supply it can quickly become a full-time job for the business owner. This, in turn, can distract them from their core objectives, which are to grow their client base and drive sales.

No matter the organisation size, having access to accurate business forecasts and strong customer and supplier relationships is a must. Regardless of how compelling a company’s proposition is, lenders want to see purchase orders, growth plan models and cashflow forecasts. Evidence of good financial management can help to de-risk proposals by demonstrating when and how sufficient profits will be earned, in order to repay the loan facility. Most importantly, however, lenders are keen to see personality, innovation, and drive in the current climate – these elements can set tech companies apart.

As the UK’s highest growth sector, the government must continue to stand behind tech companies, offering support where needed and encouraging lenders to keep finance channels open. Providing incentives, grants, loans, and mentorship programmes will also help to ensure that tech companies survive and thrive in the year ahead. 

Despite the perfect storm that businesses and lenders are navigating, now is not the time to remove access to tech sector finance and doing so could have dire consequences for the UK economy. Loan finance must be ring-fenced so these innovative businesses can prepare to make the most of any economic recovery.

Stephen Hemmings is a tax partner and technology specialist with Menzies LLP.

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