Technology businesses are playing a crucial role in Australia’s digital transformation – helping traditional industries adopt new solutions for efficiency, cost savings and improved customer experiences. Continued government support and savvy adoption of artificial intelligence (AI) and machine learning (ML) technologies has fuelled the development of the domestic tech sector.
In the face of ever changing global markets, technology businesses are progressively exploring creative and alternative ways to secure essential funding for their growth and prosperity.
Obtaining capital allows tech businesses in Australia to navigate the dynamic and competitive landscape, fund innovation and sustain growth. Often – but not always – these companies have an eye to foreign markets from the outset. In recent times, talent acquisition in particular has been one of the primary forces behind tech businesses needing to get their hands on investment. Being able to attract and maintain the necessary skilled workforce has emphasised the need for businesses to offer competitive salaries, benefits and training programs – all of which require a considerable financial footing.
The age old question - take on debt, or surrender equity?
When raising capital, businesses generally have two main options available to them. Bringing in capital in exchange for equity, or borrowing funds to be repaid at a later date (with interest). It’s one of the most critical decisions a business can make – and there’s no right or wrong answer. It will depend entirely on the circumstances of any given business.
Some avenues are going to be more cost effective over a period of time, others will be faster to obtain. Some will depend on the ownership structure, others may be dictated by whether or not certain grants can be accessed or not.
When the time arrives to bring in capital, often when a company reaches the pre-seed or seed stage, the question of whether to finance with debt or equity is posed. Often striking the right balance will see a blend of both being implemented – but not always.
Debt raising
While it may not always be palatable to give up equity, there are various options available which provide businesses an avenue to retain full ownership of whatever it is they’ve been working hard to build. The options available on the debt financing side include traditional bank loans from established financial institutions, or alternative lenders, which have become more commonplace in a diversified financial market.
One interesting nuance of debt raising in technology businesses is their ability to structure the loan around their revenue model – such as a subscription. This may provide additional flexibility or new avenues for acquiring funds, not as available in other sectors.
Traditional bank loans
Traditional bank loans, the bedrock of economic growth throughout the centuries, are secure. But while they won’t involve relinquishing any ownership, they will often require considerable collateral to be held against the loan. This will often be a difficult hurdle for early stage businesses, who have largely been self-funded to this point in time.
Alternative lenders
Alternative non-bank financial institutions often have more flexibility in their lending criteria compared to traditional banks which allows them to cater to a broader range of business types and financial situations. Businesses seen as “higher risk”, including entrepreneurs, start-ups, and those with fluctuating credit histories, often rely on non-bank lending options for financing solutions. This is also often the case for businesses involved in “riskier” sectors, such as FinTech or even property development and construction.
Smaller and more nimble than traditional banks, non-bank lenders can tailor loan facilities, provide faster loan approvals and give businesses more personalised service. With their greater flexibility, non-bank lenders can offer businesses a range of lending options including secured and unsecured loans, low or no doc loans, short-term loans, lines of credit and asset-based lending.
Peer-to-peer (P2P) lending platforms
Peer-to-peer (P2P) lending platforms allow borrowers to obtain loans directly from investors. These specialised online platforms facilitate loans at competitive interest rates with faster approval times and more flexible lending criteria compared to traditional banks. P2P lending is an appealing option for small and medium-sized enterprises (SMEs) and businesses with high credit risk, unable to acquire the assistance from traditional sources.
Equity raising
The options available for raising equity are many. Being spoiled for choice is not always a good thing – although it does afford businesses a degree of added flexibility. Other corporates, angels, VC’s or crowdfunding platforms are all viable options. More established businesses also have the option to IPO.
Crowdfunding
Crowdfunding platforms allow SMEs to raise capital through small investments from many individuals. With increased popularity due to its accessibility and ability to offer wider business exposure, businesses can choose from different types of crowdfunding. These include equity-based, debt-based, reward-based, and donation-based crowdfunding. Ideal for helping start-ups access capital, crowdfunding caters to a range of different business needs and goals. Platforms like Kickstarter or Indiegogo allow businesses to raise funds from a large number of individual investors. This can be an effective way for tech companies to showcase their products or ideas and secure funding from a broad audience.
Venture Capital (VC) firms
Venture Capital firms invest in high-growth startups and early-stage companies with significant growth potential. In return for their investment, they typically take equity in the business. Australia has a growing venture capital ecosystem, with many firms focusing on technology and innovation.
Angel investors
Angel investors are individuals who invest their personal funds in startups and small businesses. They often provide mentorship and guidance in addition to capital. Many angel investors have experience in the tech industry and may be interested in supporting innovative tech startups.
Private Equity (PE) firms
Private Equity firms invest in established businesses, often with a focus on growth and expansion. While they may not be as common for early-stage startups, they can be an option for tech companies that have already demonstrated a certain level of success.
Debt or equity - the choice is yours
As each capital raising option offers benefits (and risks) for both the borrower and lender, businesses should carefully evaluate their specific circumstances before choosing an option.
While some options may offer flexibility and quick access to finance, risks include loan default, potentially higher rates of interest and higher fees. By understanding the available options, businesses can make informed decisions for their growth and success.
It is also worth keeping in mind the various government programs in Australia which offer grants and subsidies to support research, development, and innovation in the tech sector. These programs are designed to encourage technological advancements and stimulate economic growth.
How Madison Branson Lawyers can help
Madison Branson Lawyers has a strong track record working across banking and finance deals with fund managers, banks, non-bank and sophisticated lenders and investors. Our relationships are not defined by the transactions themselves and we regularly connect borrowers, lenders and investors to help facilitate commercial agreements.
We have decades of combined experience in complex, high-value, banking and finance deals for projects across a number of sectors, including technology and FinTech, property and construction. Our team leverages fast-track finance through alternative lenders and draws on sophisticated tech-integrated capabilities to expedite the loan process. We take a robust legal approach to transactions which strikes the right balance between financial risk and opportunity, ensures regulatory compliance and avoids costly pitfalls.
For a confidential discussion, contact us today.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only.
