IT Company Financing
Many of us, especially younger generations who have grown up with technology, do not realize the impact that the Information Technology (IT) Industry has had in our daily lives, or society as a whole. You can walk down the street and see endless amounts of people tethered to their iPhone’s and iPad’s; but this industry has also played an incredibly influential role in the way business is conducted, education, agriculture, medicine, banking, environmental advancements, and even simple day to day household appliances that we heavily rely on today. Advancements made through the IT industry have fueled economic growth in the world today, as well as advancing the well-being of modern society. The major defining groups of the Information Technology Industry are life sciences, advanced manufacturing, advanced materials, energy and environmental sciences, and information technology (IT). The dominating group is by far the IT industry; this group has had the greatest impact on society overall, as well as pushing along the other four groups of the technology information sector.
What is Information Technology?
The Information Technology (IT) sector is defined as “the use of any computers, storage, networking and other physical devices, infrastructure and processes to create, process, store, secure and exchange all forms of electronic data.” This term also includes the workers that develop, implement, and utilize these technologies. The IT Industry encompasses hardware, software, services, infrastructure, information, and digital business. This industry is incredibly diverse, allowing a multitude of companies to enter the ring when competing to create top of the line, innovative technology.
According to research done by IDC, the global IT market “surpassed $3.7 trillion in 2015 and is on track to reach $3.8 trillion in 2016”, with over $1 trillion being generated by the United States market alone. The Information Technology industry is constantly booming and expected to continue to grow, leading to the IT industry seeing an expected growth of 3.9 million jobs to 4.4 million jobs by 2024, which is about a 12% increase; this is faster than the average increase for all other occupations! In 2015, according to the Bureau of Labor Statistics, United States employment in the Information Technology sector remained at a low of 2.6%, which is below the general rate. This is only expected to continue in the next few years, allowing many people to confidently predict the future of the Information Technology industry.
Information Technology Trends
For starters, the IT sector is expected to transition into a heavy reliance on clouds, unicorns, big data, and fast data, which in turn is forcing many small IT companies to merge, or at least heavily rely, on larger companies. According to Comptia, cloud computing is the largest sector in the Information Technology industry. “Nearly all the other trends in the IT sector are actually triggered by the cloud: for instance, the rise in demand for real-time analytics, the reconsideration of security models, and the industry refocusing on software and hardware above hardware as the principal growth driver.” While this is a major step forward for plenty of companies, some technology industry insiders are speculating that as the economy and industry evolves, a small select group of information technology companies will dominate the industry, forcing many smaller companies to call it quits. However, there are still many speculations that are viewing the 2016 industry data differently. They believe that with the rapid increase in demand for next generation technology, the fragmented economy will allow almost any innovator and company to enter the Information Technology sector. Most people are starting to lean towards the latter, especially when considering that, like most industries, small businesses continue to dominate the Information Technology sector.
The industry is also quickly evolving into next generation products. In a 2016 PwC global survey that included over 1,000 CEOs from all major industries, 61% of global chief executives and 78% of United States respondents said they were very concerned about the rapid rate of technological changes in their industry. A similar study showed that 45% of technology company CEOs said that their company had entered a new industry within the last three years. This incredibly fast succession into a variety of information technology fields only continues to open the door for next generation products. This means that the demand for next generation developers is rapidly approaching, and major Information Technology companies are no longer considering their employees as interchangeable commodities. This is forcing major IT companies to increase salaries, but also making them bring in more talent, leaving many companies at a loss for reaching payroll, increasing the need for dependable and obtainable financing options.
Why Would an IT Company Need Financing?
As mentioned above, many Information Technology companies, especially the smaller businesses that account for over 85% of the Information Technology sector, are struggling to meet payroll costs right now due to the increased need for more, top of the line developers who are considered a rare commodity right now.
- Working capital financing options to help fund the development of new products is essential in today’s growing Information Technology industry. Staying ahead of the game in this rapidly growing industry is the only way to keep business open and booming today – and having enough capital is difficult when developing new, innovative products for this sector.
- Marketing your new technology products is essential when trying to compete against large, name brand companies that already have a large standing in the Information Technology field. Loan options to help market your new products could be the determining factor in beating out products from other, larger companies.
- Expansion of your business is never affordable, especially if you are a newer, smaller business in the Information Technology industry. There are always financing options available.
- Equipment in your offices are essential in the Information Technology industry – you cannot create quality, innovative technology without the latest equipment to work on! Exploring different financing options to keep your work equipment up to date is essential in the thriving and constantly growing Information Technology industry.
Information Technology Loan Comparison
|Bank||6-10%||3-7 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
|Invoice Finance||1-2% weekly||1 – 90 days||1-3 days|
Information Technology Bank Loans
For IT companies, the best financing option will always be traditional bank term loans and lines-of-credit. Bank financing’s fantastic rates allow companies to obtain affordable loans for just about any purpose, without losing profits through expensive interest rates. With that having been said, in order to qualify for this type of business loan, an IT company needs to have good credit and sufficient revenue and cash-flow.
Documents an IT company needs to obtain bank-rate financing includes:
- IT Company tax returns (3 years)
- IT Company’s financial statements
- List of IT Company Debt
- Owner’s tax returns (3 years)
- Personal financial statement
SBA Information Technology Loans
SBA loans are the next best type of business loan if a traditional bank loan is unavailable. SBA financing are loans provided by traditional lenders that are partially-guaranteed by the govt. Should the information technology company default on its SBA loan obligations, the government will cover a portion of the lenders losses.
SBA financing documents needed by IT companies:
- IT company tax returns (3 years)
- IT company financials
- IT company schedule of liabilities
- Personal tax returns (3 years)
- Personal financial statement
Alternative Business Loans For IT Companies
Alternative business loans (institutional lending) are the next best option if traditional financing is impossible. Non traditional lenders tend to look at an IT company’s cash-flow rather than credit, and can provide financing within days, not weeks and months like traditional business lenders.
Minimum documents needed for an IT company to obtain alternative financing:
- IT business tax returns (2 years)
- IT business financials
- Schedule of liabilities (list of all business debt)
- Personal tax returns (1 year)
Asset Based Information Technology Loans
Asset based lending allows IT companies to leverage the accounts receivable to obtain necessary business financing. If a company has strong AR, they may be able to obtain a line of credit secured by the company’s accounts receivable.
Documents needed for IT asset based lending:
- Credit Application
- Financial statements
- AR and AP aging schedules
- Schedule of liabilities
IT Equipment Financing
Equipment leasing helps IT firms that are in need of equipment obtain such equipment without having to pay the full costs upfront. A equipment leasing company will purchase the equipment for the IT firm, and then lease the equipment to the IT company for a period of time.
Documents needed for IT equipment leasing:
- Bank statements
- Vendor quote/purchase order
Information Technology Cash Advances
Cash advances are rarely the first choice of IT companies and small businesses seeking financing. But if the business is unable to obtain financing elsewhere, it may be the only option avaibable. While MCA and ACH loans high very high interest rates, they do in fact fund very fast, which is helpful to companies in need of fast working capital.
Documents needed for a merchant or business cash advance:
- Bank statements and/or credit card statements