Funding for technology companies: beyond venture capital

Why technology businesses look different to lenders

Software and technology businesses typically hold few tangible assets, which limits the appeal of traditional secured lending. What they often have instead is recurring revenue, intellectual property, and in some jurisdictions a claim to research and development tax credits, all of which have become the basis for specialist funding products over the last decade.

Lenders in this space have adapted their underwriting accordingly, focusing less on physical security and more on the durability and growth rate of recurring revenue, customer churn, and the diversity of the customer base.

Revenue based and recurring revenue finance

Revenue based finance provides an advance against future revenue, repaid as a percentage of ongoing sales, and suits subscription businesses with predictable monthly recurring revenue. It avoids the equity dilution of venture funding and does not usually require a fixed monthly repayment that could strain cash flow in a slower month.

Recurring revenue lending, sometimes structured as a term loan against annual recurring revenue, works similarly but with more traditional loan mechanics, and tends to be reserved for businesses with revenue multiples and growth rates a lender can benchmark against known comparables in the sector.

R&D tax credit and grant backed finance

In markets where research and development tax relief exists, some lenders will advance funding against the anticipated credit before it is actually received, bridging the gap between spending on development and the tax authority processing the claim. This can be a genuinely useful tool for businesses with heavy development spend and a proven track record of successful claims.

Grant backed finance works similarly where a grant has been awarded but is paid in arrears against milestones, allowing the business to fund the work upfront against the confirmed but not yet received grant income.

Receivables and contract based options

Technology businesses selling into enterprise customers on long payment terms can use invoice finance against those receivables in the same way any other business would, provided the customer base is creditworthy and the contracts are genuine sales rather than pilots subject to cancellation.

For businesses with signed multi year contracts, some specialist lenders will fund against the contracted future value, though this is a more specialist and typically more expensive form of lending than standard receivables finance.

What lenders scrutinise most closely

Customer concentration is a key risk area: a business generating half its revenue from one customer is viewed cautiously regardless of how strong that customer relationship appears. Churn rate, the cost of acquiring a customer relative to their lifetime value, and gross margin are also examined closely, since these determine whether growth is genuinely sustainable or being bought at an unsustainable cost.