Fund working capital with private debt finance
Many companies rely on external financing to meet a shortfall in working capital, especially for those with irregular cash flows. This situation is especially prevalent amongst small businesses, which typically only have one month of cash buffer in reserve.
Technology companies often also have short cash runways, though there are some differences to a typical small business. Generally, technology companies offer a service and there is no inventory. Further, SaaS companies run a subscription-based business model and collect full payment up-front. Revenues are also recurring and consistent.
Theoretically, this means that there is no need for working capital financing. However, for ambitious and fast-growing technology companies, cash must be reinvested aggressively to capture market share and to drive growth in a highly dynamic industry. Else, companies will risk being left behind by competitors.
For some technology companies, there is also seasonality in terms of revenue and working capital financing can serve to smooth out cash flows.
At Fuse Capital, we have helped more than 350 clients secure private debt for their working capital needs.
Common use cases which we have encountered include:
Funding customer acquisition
Expanding market coverage
Maintaining ongoing operations
Using it as a safety net during major market dislocations
As we will go on to illustrate below, there are a million and one different financing options for working capital. However, most are traditional methods based on tangible assets and thus, difficult to use for modern technology businesses.
As such, we believe that tapping private lending for working capital remains the most attractive option for fast growing, small-mid size technology companies.
Why use private debt for working capital financing
So, what options do companies have for financing working capital?
Private credit is provided in the form of term loans which can be short or medium term in nature. These loans can be secured, unsecured or come with a personal guarantee. The key advantages of private debt is that they are highly flexible and can be executed quickly.
There are two types of bank financing for working capital. The first is a revolving credit facility, which is also known as a revolver or a working capital credit facility. This is a pre-approved source of funding which serves as a useful safety net, as the borrower only pays interest on drawn/outstanding funds.
However, such financing is difficult to secure, especially for small companies post the Global Financial Crisis in 2008 as bank lending and underwriting standards have tightened considerably. The loanable amount is also traditionally tied to your accounts receivables and inventory, which technology companies do not have, though the bank does evaluate your cash flows which is typically made up of recurring payments.
The second type of working capital financing banks offer is the overdraft. Similarly, not many companies can secure it and even if they do, credit limits are low as it is a form of unsecured lending.
Invoice factoring and financing
Invoice factoring refers to selling a company’s accounts receivables in exchange for a discounted (e.g. 80%) upfront payment. When your customer makes the full payment, the lender will disburse the remaining balance (e.g. 20%) net of fees to you.
Invoice financing is similar, but the concept is different. It is about applying for a loan using your accounts receivables as collateral. You could receive 80-100% of the receivables net of fees, which you have to pay back over a period of time.
Both invoice factoring and financing are very commonly used methods of financing working capital. However, these methods are more applicable for non-technology companies which sell products and have high levels of account receivables.
For technology companies where these methods make sense, the advantage is that funds can be disbursed quickly, but the loanable amounts are limited by the value of your accounts receivables.
Both banks and third parties provide trade financing, which ensures that international shipments of goods go through. However, this is more applicable for exporters and importers of goods, rather than for technology companies in general.
As the name suggests, this working capital financing method is not applicable for technology businesses as most do not have much tangible assets.
Other niche financing methods
There are many other working capital financing methods. These methods are categorized here as they are niche methods and amount of loanable funds is typically low. These methods include customer advances, merchant cash advances, tax bill funding, trade credit/vendor credit, business credit cards, payroll loans, auto financing, etc.
Evaluation of the various financing tools for working capital
As such, we believe that with the right partner, private debt can be the most attractive working capital financing method for fast growing, small-mid size technology businesses.
This is because this option is highly flexible, not difficult to access, allows access to larger funding amounts, is fast to execute, can be covenant lite and not restrictive, and is inexpensive.
How to use private debt for working capital
Here's how SLR Dynamics maintained 100% shareholding and grew
As mentioned, we have helped over 350 technology companies use private working capital financing to grow their businesses.
One such company we have helped is SLR Dynamics.
The Company provides end-to-end solutions from comprehensive Managed Services for entire solutions and application estates, to agile and adaptive support for specific test and automation projects.
SLR had developed an automation testing tool which they had wanted to roll out to more clients. They had always been using short term loans as they did not want to dilute their shareholding with equity. This proved to be expensive and time consuming as they had to keep re-financing the loan.
With our help, SLR secured a longer term and larger loan of £2.5m.
This enabled them to:
Test and invest in their in-house automation tool
Roll out the tool to more clients and win new contracts
Continue their ongoing operations
Maintain a 100% shareholding
How Fuse Capital can you help source the best private debt solution
As a debt advisory and brokerage established since 2013, we are deeply rooted in the business community.
We have close working relationships with some of the most technology savvy private debt lenders in the world and have helped over 350 technology businesses secure private debt solutions to support their growth.
This means that we are able to help you save precious time by reaching out to hundreds of capital providers with one go, as well as reach out to the most appropriate capital provider, anywhere in the world for your needs, while keeping your business name anonymous.
Private debt funds like to work with us for the same reason – we save them a great deal of time. We know what they want, what companies want and we help accelerate the matching process. We are able to do this as we are like an intelligence hub – we get inbound requests all the time, both from funds and from companies.
Further, our deep expertise as debt providers and entrepreneurs allows us to evaluate your business model accurately, present a convincing case to our partners, structure a debt deck to highlight your goals and to help you fight for the best loans terms.