Technology Company Loan Requirements: What Lenders Look For
Lenders evaluating a loan to buy or refinance an IT services firm or software business are looking at a company whose value lies mainly in client relationships, contracts, code and people rather than buildings or machinery. Knowing the typical technology company loan requirements before applying can help a borrower prepare a complete package and anticipate the questions a lender is likely to ask. Requirements differ by lender and program, and every loan is subject to lender approval.
This article is general information for buyers and owners of existing, operating, profitable technology companies. It does not address venture funding, financing a new company or financing product development. Nothing here is a commitment to lend or legal, tax or financial advice.
1. Documented Cash Flow
Lenders typically start with whether the company’s documented cash flow can support the proposed debt after operating costs and a reasonable salary for the owner. They will review business tax returns, financial statements and interim results, and they will want any owner adjustments clearly supported. See our guide to technology company valuation.
2. Recurring Revenue Records
Lenders may ask how much revenue comes from ongoing agreements versus projects or product resale. A client list with billing history, sample agreements and a reconciliation of billing to bank deposits can make the review smoother. See our article on managed services contracts.
3. Customer Concentration
Lenders frequently request revenue by client and copies of key agreements, including assignment or change-of-control terms. Heavy concentration may lead to additional questions or structural requirements. See our article on IT company customer concentration.
4. Profitability by Service Line
Clear reporting of gross profit on managed services, projects, resale and subscriptions helps a lender understand where earnings come from and how stable they may be.
5. Management and Transition Plan
For an acquisition, lenders evaluate the buyer’s technical, management or industry experience and the plan for retaining clients, engineers and key relationships. A seller transition period may be part of the plan, subject to program rules.
6. Diligence Items Specific to Technology
Lenders may ask about ownership of any software the company sells, insurance coverage, pending claims, known security incidents and vendor relationships that are important to operations. Issues in these areas can affect the review.
7. Equity and Deal Structure
Lenders generally expect the borrower to contribute equity. Seller financing may be part of the structure, and lenders will review the terms of any seller note or earnout. SBA-backed loans have their own rules; see our guide to SBA loans for technology companies.
8. Collateral and Personal Financial Information
Technology companies frequently have limited hard assets, so lenders weigh cash flow alongside available collateral, which may include business assets and, in some cases, personal assets. Lenders will also review the borrower’s personal financial statement, credit and tax returns, and may require personal guarantees.
Conventional Financing
Depending on the borrower and the transaction, conventional business loans may be an alternative to SBA-backed financing. To estimate payments on a proposed loan, try our conventional loan calculator.
Preparing a Strong Package
Borrowers who assemble complete, consistent records, explain unusual results and present a realistic transition plan can help lenders evaluate the request efficiently, though decisions and timing remain with the lender.
US Professional Funding helps buyers and owners of existing, operating technology companies prepare financing requests and evaluate options. Learn more about our technology acquisition financing.
