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Less- or non-dilutive bank debt alternatives do exist for mid-market technology firms… but there are considerations that should be taken before pursuing them. John Hoesley, Head of Sterling’s Innovation Finance Group, breaks down what founders need to know.
CHOOSE YOUR BANK WISELY. Founders often work with larger, less-focused financial institutions, mainly because they’ve ‘always banked there.’ These founders often face a harsh reality: their day-to-day banks don’t actually understand their businesses or, worse, the unique and rapidly-evolving dynamics of the technology sector.
When assessing your banking partner, it is important to look at their lending habits objectively. Are they quick to issue loans only to have knee-jerk responses to the inevitable speed bumps in a firm’s path? Look for banks whose underwriting is mapped primarily to business risk (whether investors are involved or not), which affords a better understanding of firms’ unique management, model, and markets. Armed with that knowledge, these banks are better able to respond to changes impacting the firm and identify opportunities and anticipate challenges in the market as a whole.
MATCH SOLUTIONS TO WHERE YOU ARE TODAY. While there are rarely ‘one size fits all’ solutions, firms should look for banking partners offering credit solutions across all stages of business development:
ASSUME NOTHING. The timing of bank debt availability is often misunderstood. Founders often assume bank debt is not available to firms with negative free cash flow, or absent significant asset bases or investor support. The truth is, by understanding the firm’s business model—and the fact that growth investments often consume cash but drive enterprise value—experienced technology lenders can often underwrite to firms with so-called “cash burn” profiles in cases where gross and net retention, LTV/CAC, and unit economics are strong.
Sterling’s Innovation Finance Group provides a full suite of lending and banking products to growing technology companies across all stages of development. To learn more, visit snb.com/innovation-finance.