Banking considerations for technology companies

“Risk. Innovation. Deal Term Sheets. Flipping the Business.” High-tech words and phrases like these describe the very essence of hundreds of technology companies in the state of Missouri.

For traditional business banks, terms like “conservative” and “risk-averse” are more appropriate terms…a profile that is very different from the energetic technology companies and all of the trappings of entrepreneurship.

Commercial banks usually loan to companies in established industries with long track records of profitability and strong financial statements. However, if you own a new high-tech company and are not yet generating a profit, most banks probably won’t talk to you. So where is the middle road for Missouri-based technology companies looking for a banking partner?

Banks that understand technology companies know that traditional attributes may not capture the true value of an enterprise. Such banks are willing to consider other factors. For instance, the expertise and track record of a high-tech company’s CEO and top management adds an element of worth. Another critical factor for start-up firms is whether the company has gained investor backing or other capital such as SBIR research grants. If the company has received investor backing, the larger and more experienced the venture capital firm or angel investment organization is the better chance the company will have to obtain a bank loan. Technology bankers will also assess the company’s intangible assets. For example, patents, copyrights and trademarks may be considered acceptable collateral.

Solid financial health is an important criterion for today’s technology companies. Your banker is among the many key relationships you must build and develop as a technology company, so choose your bank and banker wisely.

Referrals are often the best way to find a specialized bank that understands the needs of tech companies. Ask your equity investors, attorneys, CPAs, or other advisors for advice. Also make sure you do your own due diligence. Researching and finding the correct bank now can prevent trouble and reap enormous rewards in the future. That’s why knowing what issues need to be addressed at the start of your relationship are so important.

Tech-oriented companies should consider the following points when searching for a solid, long-term banking partnership:

• Find tech experience. It is essential to find a bank that does business with technology businesses. They must understand the issues in the tech world. Look for a bank that has the personnel who can help with your unique technology needs. Make sure your bank has experience in international banking and can do letters of credit, wire transfers, electronic payment processing, and other instruments that are needed for an international business.
• Learn to communicate. As location is to retail, communication is to a great relationship with your banker. Communicate, communicate, and communicate some more. Meet with your banker on a regular basis to review the statements from the past reporting period and provide him or her with notes on that period and projections for the next reporting period.
• Create partnership. It is important to understand your company’s relationship with your bank should be a partnership. While you will have needs requiring a bank’s assistance, banks also will have needs. Start building this relationship even before you have lending needs.
• Eliminate surprises. It is imperative that you not surprise your banker. Bankers don’t like surprises. Most good tech bankers have seen virtually every situation your financial statements will reveal, and they can help you navigate through any rough water with the bank. It is important that you communicate well. Be honest and realistic and your banker probably will be able to help you in rough times.
• Inspire faith. It should be obvious that your banker’s main concern is all about making a profit on your relationship. It may be the profit on the transactional accounts that you open, but it is definitely about being repaid on the loan that you obtained. The objective should be to inspire genuine, earned confidence, not to fool the unsuspecting lender.

It is important that a tech company find a bank that can be a great partner and has the experience to help. This type of relationship will help manage the many challenges you will face. This won’t necessarily keep your tech company out of trouble, but it will provide you with a respected business partner who will help make your life easier.

This story was featured in the MissouriBusiness.net newsletter in December.