Financing Options for Unsponsored Companies: Bank Loans vs. Insured Technology Financing

This post is the second in a three-part series. Read Part 1: Background and Choices, and follow along for Part 3.

Nearly all growing technology companies reach a point where the business’s next phase becomes reliant on additional and substantial funding. For those without traditional venture capital backing, the options can be limited, but bank loans have been a long-standing preference across industries. These loans are still some of the most commonly sought-after types of financing due to the safeguards characteristically in place in traditional banking, as well as the relatively low interest rates and non-dilution of equity.

In Silicon Valley, many banks have a technology group or practice, dedicated to working specifically with technology companies. While some banks focus their technology practice on large national or multinational corporations, others will lend to technology startups, sometimes even with negative cash flow. These banks understand the specific needs of startups and entrepreneurs, and some work through all stages of the growth cycle, expressly equipped to handle mergers and acquisitions, corporate buyouts, and IPOs. 

Despite their specialization, though, a term loan through a bank’s technology practice mostly follows the standards of this traditional business option.

Term Loans

A business term loan is likely the most conventional bank lending option. Provided by a financial institution, a term loan furnishes a business with funds, in the form of a lump sum, to cover major costs and is then repaid with interest. Although they can sometimes be dedicated to a specific use, term loans traditionally can be used to finance most considerable business expenses.

Banks charge interest based on market rates, so based on the current economy, entrepreneurs generally have an idea what they’re going to get. Interest rates from bank loans, with a few exceptions, remain one of the most affordable options for businesses.

The safety net here goes both ways, though. A secured loan will require collateral, such as property, equipment, or other tangible assets, in order to secure funding. The collateral, or lack thereof, goes into determining the amount of the loan, and sometimes the interest rate. For a growing technology company, whose worth is largely not held in tangible assets, securing the desired amount of funding through bank loans can be challenging to near-impossible.

In addition to collateral and interest, borrowers must agree to covenants as part of the loan. A covenant is a condition to the loan, which is intended to protect the lender from the borrower defaulting on the loan due to what the bank sees as financial actions that could be detrimental to the business. A covenant could be, for example, that the borrower maintains a minimum amount of EBITDA for the life of the loan. If a covenant is broken, the lender can rightfully withdraw the obligation from the borrower, or in many cases, the borrower may have to pay a fee to the bank to waive the covenant.  

Covenants are fairly standard across lenders and loans, and they are most often not tailored or adaptive to the borrower. This lack of flexibility from banks can be problematic to entrepreneurs when the conditions of the loan are not specific to how their business is run.

PIUS’ Insured Technology Financing

Through PIUS’ proprietary insured technology financing program, businesses can access greater amounts of funding by utilizing their intellectual property (IP) as collateral. PIUS is a managing general agent (MGA), which means PIUS can work with large insurance companies to underwrite a risk when they do not have the in-house capabilities to do so. Insurers often partner with an MGA as an outside specialist to underwrite and issue the policy on behalf of the insurer. PIUS is an MGA specialized in IP insurance related to technology financing.  

Unlike banks, which have a specific set of lending standards, PIUS approaches each company individually by doing a full evaluation of the business and its IP. This can be anything from traditional IP – like patents and trade secrets – to less traditional intangible assets, like contract rights, brand names, software code, or recurring revenue. PIUS doesn’t require traditional collateral, and in fact has proven through past transactions that this holistic view of a company is a better indicator of long-term success. 

Like banks, PIUS’ interest rate is determined by market rates, with an effective rate of capital of about 10%. By collateralizing a company’s IP, and backing it up with insurance, borrowers get more capital at better rates, with loans facilitated by PIUS ranging from $10 million to $45 million, or more.

PIUS also customizes covenants to a borrower’s business model. In the instance that a borrower may break a covenant, PIUS works as a liaison between the borrower and lender to rectify the situation.

Beyond the financials, PIUS acts as a long-term partner for the borrower, by providing the insurance, bringing the capital source via institutional investors, and monitoring the transaction, for a complete solution.

Check back for Part 3, where we will examine venture debt vs. PIUS’ insured technology financing.