For growing technology companies, the ability to raise capital can often make or break a business. And the options for funding are limited, at best. There’s the venture capital route, but that requires equity in the business, giving up a portion of ownership to the investor. Alternately, there’s venture debt, which is expensive – and in many cases – reserved for companies who are already VC-backed. Traditional bank loans are significantly less expensive and often don’t require equity ownership in the form of warrants, but often companies simply can’t get enough capital from a bank.
Technology companies are increasingly seeking out alternative solutions that make more sense for their business and their financials. Insurance, like PIUS’ proprietary insurance product, can provide a growth stage tech company with options otherwise unavailable. By utilizing their intellectual property as collateral, technology companies can secure lower cost financing options without dilution.
What qualifies as a technology company?
First, it’s important to define what we consider a technology company. Contrary to popular opinion, technology isn’t limited to simply high tech. PIUS’ mandate goes much further. It can include contract rights, recurring revenue contracts, brand recognition, or proprietary processes or data. This makes the pool of companies eligible for insured financing larger, providing opportunity to those that may not typically fit the convention.
Unlike historical lending standards, utilizing insurance to secure financing is not solely based on software, patents or other tangible asset. Because collateral is not always best expressed through these means, PIUS’ program recognizes the value in a company’s intangible assets.
How does it work?
Technology is a growth area poised to propel the national economy. Yet many growth-stage companies don’t have the cash flow to invest back in their businesses to expand and meet their full potential. By creating liquidity based on intellectual property, companies can generate the necessary financing through this insured vehicle.
PIUS was the first to facilitate this type of loan and develop the structure to apply it to other promising technology companies. Through PIUS’ thorough and accountable analysis, we have facilitated more loans and more capital than any other broker or MGA. PIUS is also the only agent to successfully exit transactions of this kind, meaning the loans have been paid off, proving the process works from beginning to end.
How can companies access insured financing?
Companies can obtain insurance to secure financing through a managing general agent (MGA), like PIUS. PIUS focuses on high quality deals where investors take on investment-grade risk in the transaction – basically buying the risk of the insurance company. Because an MGA represents the insurance company, it is on the hook for that risk, making it much more selective in its transactions. Additionally, because PIUS wants to decrease any likelihood for default, it is also aligned with the borrower, as it accomplishes this by keeping the cost of capital as low as possible.
At PIUS, our team performs a risk analysis on the company’s assets and a credit analysis on the financial feasibility so that an insurance company is comfortable essentially guaranteeing the loan. We receive compensation when a loan is paid back.
Beware, however, that not all products are the same. A broker may increase the cost of the product to account for their commission. Some brokers charge clients as much as 8% per year, whereas an MGA like PIUS will usually charge about 3.3% per year. Although PIUS does work with select, appointed brokers, PIUS pays those brokers directly so as not to increase the cost of the insurance to the borrower.
While PIUS was the first to develop a product to insure intangible value, the need has existed almost as long as business itself. Over the past few years, PIUS has evolved and proven to the financial markets that insured technology financing can be done safely and responsibly. As more companies begin to secure capital through insurance, we look forward in anticipation of the innovation that awaits.