How these Philly-area tech companies adjusted to the rising cost of funds

More than a year after Silicon Valley Bank collapsed and nine months after the U.S. prime lending rate hit 8.5% for the first time since 2001, tech finance remains busy and competitive, practitioners say.

“The business grew dramatically overnight. People were looking for a place to move from [Silicon Valley Bank],” said Tom Harper, the Conshohocken-based chief of the national tech banking group for Wells Fargo, the biggest commercial bank in Philadelphia and many other metro areas.

The growth in tech financing comes as overall, U.S. bank lending has stalled, slowing real estate development and other industries. The Federal Reserve reported total bank commercial and industrial loans, after rising from a pandemic drop, have flattened at around $2.8 trillion a month for the past year.

Add the effect of inflation, and zero growth actually means there’s been a small decline. PNC Financial Services Group, the largest bank based in Pennsylvania and fifth-largest in the United States, says its total commercial loans slipped to $219 billion during the first three months of the year, from $225 billion a year earlier.

However, big banks, sensing opportunity as more than $200 billion in loans and investments left the once-leading tech lender, have made lending to a range of tech-focused companies with solid business plans “an incredibly competitive space,” Harper said.

Funding for biotech ventures, a key industry in Philadelphia — and a main focus of Silicon Valley Bank in the year before its collapse — remains down nationally after huge speculative investments in 2017-2021, according to data collected by PitchBook.

Yet demand for software and financing for software developers and sellers has continued to rise, though the business is tough to track with so many non-tech companies borrowing to finance software projects, said Bob Dunn, managing director at the Association for Corporate Growth’s GF Data unit, which collects data on private company sales.

There’s also an increase in nonbank lenders financing big technology purchases, artificial intelligence applications, acquisitions, and other deals.

“Anecdotally, the tech market is really buoyant, and a lot of deals are happening. There’s a lot of need for capital in that sector,” Dunn said.

Another sign of tech prosperity: Software and other information technology stocks rose more over the past year than any other major sector, according to Standard & Poor’s.

Harper observed that the March 2023 government takeover of Silicon Valley Bank didn’t scare off lenders, but instead attracted a flood of rivals eager to finance tech companies around the U.S.

“We saw a lot more interest from tech companies in doing business with larger institutions, regulated in a way that makes people comfortable,” he said.

Delaware company Best Egg is an example of how big banks have partnered with tech companies.

Wells Fargo’s tech group offers a lifeline for borrowers like Best Egg, one of the financial technology (”fintech”) lenders that private investors began backing in the early 2010s to make unsecured personal loans online. Best Egg finds borrowers through Credit Karma and digital and direct marketing.

Best Egg has since added credit card, rent-based, auto, and other secured loans; personal-budgeting tools; and other products. Chief executive Paul Ricci now prefers the term neobank to describe companies like his.

Best Egg employs 900. It has originated $30 billion in loans over the past decade and expects to collect around $500 million in interest and fees from $10 billion in outstanding loans this year.

The 10-year-old company has been banking with Wells Fargo since its founding, drawn by what CEO Ricci calls “the large scale and capabilities of one of the biggest banks, and its focus on fintech.”

From its early days, Best Egg raised cash for future loans by selling earlier loans to investors.

To raise money that way and to lend it faster than traditional banks so customers kept coming, Best Egg needed a bank that could offer not just financing, but help with payment systems to track and speed debts, payments, and financing from investors to borrowers and back.

Wells Fargo — the third largest U.S. bank — provided lenders like Harper, who understood the tech industry, the large scale to handle complex accounts and the long-term focus to stick with tech clients through industry downturns and interest rate hikes, Ricci said.

“A lot of online lenders will be consolidating,” he predicts. He said Best Egg is now big enough and strong enough to be among the acquirers.

Engine Room is a 14-person Philadelphia digital-marketing agency that’s much smaller than Best Egg but shares key attributes: It’s profitable, so Engine Room hasn’t needed venture capital or private equity investors sharing ownership, profits, and control, and it’s a marketing-technology company, relying, with its clients, on careful management of customers’ digital payments.

“We will sometimes partner directly with clients — websites, e-commerce sites,” company president Dennis Egen said. “When there’s any degree of complexity, they need us to customize the website. Our bread and butter is doing that maintenance work. We’re profitable, so I figured a bank loan was the best way to go.”

Egen earlier worked for the Wilmington-based Archer Group, whose bank was the former Wilmington Trust Co. M & T bought Wilmington Trust in 2010, so Egen applied to the successor bank. “It was our first time doing a business loan, we didn’t have any capital, and I didn’t have a trust fund, so a [federally guaranteed] Small Business Administration loan was the only realistic option.”

That was in 2016. M & T, the 18th largest U.S. commercial bank last year, was the sixth-largest SBA lender. With federal guarantees, SBA enables banks to lend at lower rates than the prohibitive charges a first-time lender would otherwise face.

As Engine Room paid its SBA loans on time, while boosting sales and profits, M & T passed the company out of the SBA program with its paperwork requirements and federal guarantees, and now lends to the company directly, said Christina Smaczniak, director of government lending at M & T. “We look to help them grow over time.”

Egen was ready to finance expansion and add senior staff in 2023. He had lined up new customers. “That required outside financing before the big projects start, and we wanted to put more money into sales and marketing.”

Backed by bank financing, Engine Room is growing “according to plan,” doubled sales last year to $3.5 million, and hopes to approach $5 million for the first time this year.