As the start-up ecosystem in India strengthens, many new classes of capitals are being introduced. And of all the capital classes, both investors and entrepreneurs find revenue-based financing a distinct solution.
Since its adoption in India in 2020, more and more start-ups and small enterprises (SMEs) are pivoting towards this financing option. That’s because it allows businesses to obtain a sizable funding without liquidating their equity.
Potential SAAS and D2C companies can opt for revenue-based financing solutions from KredX, a leading integrated cash flow solutions provider.
But before discussing why RBF is a better capital choice for start-ups, let’s clear the air around it.
Revenue-based financing is a means of obtaining credit by leveraging estimated earnings. Borrowers need to pledge a specific percent of their income, also known as revenue share, to the investor or lender. Thereafter, they need to repay the principal amount + revenue share to the lender.
For better understanding, take this example. Suppose company A’s monthly average earnings stand at Rs 30 lakh. Therefore, their projected earnings for the year is Rs 3.6 crore. It provides this estimate to an RBF provider and a proposition to obtain Rs 30 lakh against it. After an assessment, this lender extends the sum against a revenue share of 12%. Thus, company A must repay Rs.336000, i.e., Rs.3000000 + Rs.360000 (finance cost or revenue share).
RBF companies look at several parameters like cash flow, revenues, operating margins, growth potential, and scalability, among others, as a part of their audit or due diligence. Once convinced, the lender will forward the agreed-upon amount to the borrower’s account.
The revenue-based financing model is a pioneering asset class in India that took off during the pandemic as start-ups struggled drastically to raise funds. Revenue-based financing is a hybrid capital instrument that combines the best of both equity- and debt-based financing options.
When opting for a revenue-based financing model, borrowers must remember a few things, including-
Thus far, growth capital has been an exclusive concept in India because of the extensive cost and time required. Revenue-based financing mitigates these issues to provide fledgling businesses, especially SaaS-based and D2C, with a quicker and easier means to fund their investments. Companies can opt for a revenue-based financing solution from KredX, which offers to finance against nominal, 100% digitised documentation, and within just a few working days.