Fintechs now offer loans in exchange for a slice of start-up revenues

(Image: Shutterstock)

A group of fintech start-ups is funding entrepreneurs and small and medium enterprises (SMEs) across the country through a model that does not require promoters to dilute any stake or provide any form of collateral.

Known as revenue-based financing, this trend is picking up in India in a huge way. In the current calendar year alone, new-age companies like GetVantage, Velocity Capital, Klub and N+1 Capital have lent money to at least 300 start-ups through this model.

Under the revenue-based finance (RBF) model, the lender funds the venture and charges a flat fee as interest. The borrower repays both the principal and the interest component by sharing revenues with the lender in a mutually agreed ratio. In other words, loan repayment is done through the normal revenue flow of the business.

Industry players peg the market size of RBF in India at $10 billion (roughly Rs 73,000 crore), which is a fraction of the $240 billion (Rs 17.5 lakh crore) credit gap for MSMEs estimated by Intellecap.

Incidentally, lending through this model is typically done to smaller ventures which are unable to get access to bank funding or raise money from venture capital or private equity players. Also, the average quantum of loan is much lower in this model.

More importantly, companies specialising in RBF are ready to lend as low as Rs10 lakh to a maximum of Rs 2 crore. The rate of interest for the loan is typically in the range of 4 - 8 percent depending on certain parameters.

Bhavik Vasa, Founder & CEO, GetVantage, which is among the first Indian entities to launch an RBF business model in India, said his firm has seen a more than a three-fold rise in business volumes.

“We have provided funding to nearly 50 companies spread across around 20 sectors in the last few months and the demand has gone up more than three times if we look only at the last 6-8 months,” said Vasa, whose firm plans to invest ₹350 crore to fund around 300 businesses over the next two years.

“The trend is picking up pace as RBF is perfect for smaller brands, family businesses or SMEs where access to growth capital is relatively difficult. It is also suited for entities from the non-metro towns where VC or PE players do not venture much. We also have a community initiative called ‘FoundersForFounders’ wherein we bring experienced founders to serve as a support system for the next generation of young entrepreneurs,” added Vasa.

Interestingly, access to RBF is quick as the main players in this segment use a lot of data analysis tools to dissect the company’s financials. Typically, the on-boarding exercise starts with the potential borrower submitting a lot of financial data, which is analysed using digital tools to ascertain the quantum of lending.

Among other things, data related to revenues, cash flows, operating margins, inventories and logistics are analysed in a completely online and digital manner.

“VC funding is not suitable for most companies. Thousands of profitable online businesses are getting built in India, which may not become Unicorns. But they all need growth capital. We have seen over 500 signups with 200 coming in the last two months,” said Abhiroop Medhekar, Co-founder and CEO, Velocity, which started active RBF business in early 2020.

“We are witnessing a 40 percent month-on-month growth in business volumes with over a million dollars of financing processed each month,” added Medhekar while highlighting the fact at it takes a week on an average to complete the signup to disbursement process and they are actively working towards reducing this timeline to just 48 hours.

Incidentally, the ongoing COVID-19 pandemic has been a blessing in disguise for RBF players as a large number of traditional small businesses especially in non-metro locations have been looking for growth capital to establish or expand their digital presence to reach their target audience.

Quick disbursement – a VC or PE deal could take 2-3 months to close – along with the fact that owners get to retain full ownership has made RBF an attractive avenue for many ventures.

“There is a large and fast-growing number of companies in India that sell their products online. They all need growth capital and RBF is a perfect fit for them. We believe there is potential for us to scale 10 times in the next 12 to 18 months,” said Medhekar.

Entities offering revenue-based finance operate like a fintech marketplace, connecting potential borrowers with those ready to fund. Industry players further add that due to the highly technology driven and innovative models to analyse the performance and the repayment capabilities of an entity, the probability of bad debt is almost insignificant.

“Live monitoring is the new collateral. The tech and platform innovation allows real-time monitoring of the business through the tenure allowing for active course correction and hence substantially curtailing risk and NPA percentages compared to traditional lenders,” said Vasa.

While revenue-based financing is a relatively new segment in India, it is a huge market in the US and European region with players like Bigfoot Capital, Uncapped, Lighter Capital, Fleximize and Decathlon Capital Partners among others.