revenue based financing

The COVID-19 pandemic exposed businesses to major disruptions and forced them to pivot their working models. As experts postulate on the future of supply chains, healthcare systems, and the workplace in a post-COVID-19 world, the funding engines have already adapted to transform and support sectors that will incorporate the challenges of the COVID-19 landscape.

The shift to becoming an online and digital-first economy is well underway in three to four quarters, what would have otherwise taken three to four years.

This is a pivotal moment in the growth of the Indian economy, which is best exemplified by the rise of digital-first homegrown SMEs across the consumer, startup, and SME ecosystems.

Platforms will accelerate the growth of digital-first homegrown SMEs

A robust ecosystem of SaaS platforms, digital marketplaces, and marketing platforms has sprung up to support business owners every step of the way, making it easier than ever to start a brand.

Consumer SMEs are currently experiencing a golden age, and digital-first SMEs hold a $10 trillion market opportunity, with 10 million sellers onboarded to marketplaces in 2020 alone.

Despite strong tailwinds from the supporting ecosystem, capital constraints continue.

While platforms such as Shopify, Amazon, and Flipkart, have changed the game for merchants by democratising e-commerce infrastructure and empowering merchants to go D2C, the landscape of financial products has continued to be limited to traditional forms. With 800,000+ players across D2C, marketplace sellers, Shopify/Magento users in India, we had seen only 100-150 VC investments in 2020.

On the other hand, banks tend to support mature businesses with onerous terms such as personal guarantees and fixed EMIs. While SME financing has started addressing some gaps, fluctuating seasonal revenues and business unpredictability make them harder to utilise.

With the online retail market in India expected to reach ~40 per cent penetration of organised retail by 2027, the funding gap remains large. Businesses will continue to seek innovative financing options that are mindful of the current economic climate.

Also Read: Future-proofing Singaporean SMEs for a stronger digital future

Revenue-based financing: The perfect mix

Revenue-based financing (RBF) is a form of capital best suited for high ROI use cases such as marketing, inventory, and CAPEX. It blends the best of equity and debt. Like equity, capital from revenue-based financing helps scale a brand but without any loss of ownership.

Instead of a large quantum of financing, RBF provides repeat tranches as the SMEs revenue scales. Instead of diluting equity or fixed EMIs, repayments happen as a portion of the brand’s revenues. During lean months and low seasonality, the overall impact on the business is also lower, making it a skin-in-the-game financing solution.

With repeat tranches every two to three months, we have seen some SMEs become category leaders in their segments with upwards of 100 per cent CMGR.

The right time to avail revenue-based financing

Simply put, RBF is right for any brand if it is revenue-generating. With data-driven models to assess risk, RBF has the ability to support a business at any stage and provide capital within seven to 15 days.

A lot of companies value the speed, certainty, and flexibility of RBF. Companies across their early growth and even later stages of growth are now seeing the benefit of this flexible non-dilutive financing.

Alternative or complementary?

As a company scales, it requires different forms of financing to meet recurring capital use cases. While many would claim that RBF is alternative financing and competes with traditional equity and debt capital, it essentially is complementary financing. For high-growth businesses looking to scale rapidly, ideal capital sources would be a mix of traditional financing and RBF.

Global trends suggest RBF will become a complementary offering for companies

With global players such as Clearco, Uncapped, Wayflyer, Capchase, and Pipe cumulatively raising upwards of US$500 million, the RBF market is expected to grow to US$42 billion by 2027.

If mature financial markets in Western countries can see this scale, it is anticipated that the capital needs in the Indian market to support local home-grown SMEs are even higher.

In COVID-19 times and beyond, companies can benefit from funding high ROI parts of their business by utilizing RBF as a complementary source of capital.

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