Did you know that as a substitute source for startup investment in India, small firms and entrepreneurs are turning to Revenue-Based Financing? While businesses with tangible assets and excellent credit scores should typically be eligible for a standard bank loan, what about businesses that produce income but have no collateral and subpar credit?
For entrepreneurs and small company owners who have been turned down by banks, revenue-based financing shines in this situation. Simply put, revenue-based financing, often referred to as cash flow-based lending, is financing that is dependent on the earnings that a company makes, particularly the firm’s cash inflows. Many startup investor platforms in India like Klub, are now offering Revenue Based Financing to digital businesses.
There are several benefits. The main benefit is that the borrowing entity’s promoters may get the desperately needed capital without having to give up any ownership or provide any collateral to equity or angel investors. When seeking funding from individual investors or venture capital companies, this is just not feasible. Additionally, this guarantees that promoters will continue to have total discretion over how to run the business. Private equity and venture capital firms frequently demand a board seat and are known to meddle with how their investee companies run their operations. Second, Revenue-Based Financing might be useful for businesses who are unable to obtain bank financing owing to a lack of collateral, profitability, or any other potential barrier. RBF resembles venture debt in that investors are entitled to recurring returns of the capital they initially contributed. RBF, however, excludes the payment of interest. Instead, a specific multiple of the startup’s sales is used to compute the repayments, producing returns that are larger than the initial investment. RBF may also be utilised for bootstrapped businesses since the underwriting process is more thorough and data-driven than venture debt, which only invests in businesses that have raised cash and depend on an equity cushion.
There are a large number of regulatory restrictions in place for bank/NBFC lending. As opposed to traditional debt financing by a bank or NBFC, where the collateral is often needed by the lending institution, in the case of RBF, a firm is typically not required to offer any collateral to investors. Businesses having a seasonal revenue profile have the option to pay RBF as a percentage of their revenue rather than a set amount each month as they would with the bank or NBFC loans.
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An RBF investor’s interests coincide with those of the businesses they invest in. When the business’s income increases, both partners profit from it; when revenue drops, both parties lose. In contrast, a traditional bank loan includes a set monthly payment for the loan’s term regardless of the income generated by the firm. RBF has a mechanism that tracks revenue, which aids in managing rocky periods for the company.
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