Technology-based businesses always seem to need debt capital, whether their business models involve artificial intelligence, virtual or augmented reality, cryptocurrencies or blockchain technologies. The demand for innovative, high-tech products is rapidly growing — and lenders can ride on the coattails of this high-growth sector. But, as with any borrowing arrangement, you must fully grasp the nature of an applicant’s business when deciding whether to approve a loan. Unfortunately, that may be easier said than done when it comes to complex technological products.
Research is key
Before meeting with a prospective high-tech borrower, learn about the technology at the heart of the company’s business model. Conduct Internet searches, using the company’s name and the type of technology it uses. Print or save websites that you find helpful for future reference.
Ask the business owner to explain the technology in laymen’s terms. Even if you understand the company’s products or services already, by professing ignorance you may learn important information about the prospective borrower. Also inquire whether the technology is protected by a U.S. patent or another form of legal protection.
Market research matters
Having learned how the company’s technology operates, spend time evaluating its competitors. This can include reviewing each company’s website and marketing materials as well as participating in webinars, if offered.
Compare and contrast the prospective borrower’s technology with that of its competitors. Pay particular attention to the technology as it relates to key features and functionality that end users want. You may determine that the company’s technology is more advanced than competitors’ technology, and thus better able to meet customers’ needs.
The best way to understand how a technology functions is to see it in action. Ask the business owner to demonstrate how customers use their technology — or meet with their customers directly. Focus on how the technology meets the customer’s business needs and pain points. Gather feedback on the prospective borrower’s ability to deliver the products and services customers demand.
Don’t overlook the experience of other loan officers in the bank. Ask your peers if they have experience lending to companies with similar technology. If you locate colleagues with relevant experience, consider enlisting their help in reviewing the loan application, as well as deciphering the technology and evaluating the company’s competitive advantages. You might even ask them to meet the prospective borrower during the loan evaluation process.
Documentation is essential
In addition to the standard set of documents needed to support the loan application, such as the company’s financial statements and tax returns, ask the potential borrower to provide a current version of their business plan, internal presentations and marketing materials — including any case studies, white papers and brochures. Pay attention to the terminology used and ask the business owner to explain terms you don’t understand.
Make sure you understand exactly how the company plans to spend the loan proceeds. Then, determine how you’ll evaluate whether the business owner has used the money in compliance with loan terms. Monitoring spending can be especially difficult for high-tech borrowers, because they might need the loan to fund unusual expenses, such as creating code to run the technology or upgrading hidden components that are part of a larger device.
Loan pros and cons
Suppose, after all these steps, that you determine the loan is a good risk. Your ability to explain the technology-based company’s business model could spell the difference between approval and denial.
Regardless of your bank’s experience lending to technology-based companies, the loan committee will, as usual, ask numerous questions to evaluate the applicant’s creditworthiness. Be prepared to offer exhibits that explain how the technology functions and provide a list of industry jargon. The extra time you invest will help instill confidence in the loan committee — while at the same time helping to build a credible and defensible case for loan approval.
Can you answer these questions?
Here are some important questions to ask when evaluating a loan application from a technology-based company:
- How well do I understand the company and its use of technology?
- Do I know enough about the technology and business sector to stay current with the company’s performance and ability to compete over time?
- If my bank approves the loan, how will I know the business owner spent the proceeds as agreed?
- If our bank’s CEO asked me to describe what the company does, could I do so in one or two sentences?
- What are the inherent weaknesses of the company’s products or services?
- Does the business owner have a plan in place to remedy those shortcomings?
If you can’t answer these questions, ask the loan applicant and its professional advisors, including patent attorneys and accountants, for more information. When lending to high-tech companies, there’s no such thing as a dumb question.