Innovative Ways of Start-up Financing
by Naman Rastogi
13 / 04 / 2022
Not a while ago, the only form of financing available for the early-stage start-ups was either equity capital or venture debt. While equity leads to a dilution of control, venture debt comes in very expensive as is takes the credit exposure on the start-up which is in its early stages. Thanks to the new age FinTech Lending start-ups that have completely disrupted this sector through their innovative lending products and have re-branded start-up lending to a 'Non-dilutive' form of financing!
Here are 3 innovative start-up financing products that have gained traction in the past 2-3 years:
1) Revenue Based Finance: RBF is flow-based finance where the principal is repaid in the form of a defined percentage of the daily/weekly revenue and a flat fee of 5-15% is charged as interest by the RBF provider. Repayments depend on the operating activity of the company and would be higher during peak season than lean seasons, generating different levels of annualised interest rate for the RBF provider. RBF works best for subscription-based start-ups due to certainty in the revenues. Also, RBF is getting increasingly popular among high-growth startups as RBF provider gets comfort from the increasing revenue trends and start-ups get access to non-dilutive capital at an early stage.
2) Embedded Finance: EF providers plug into marketplaces such as Amazon and provide lending as a service to shorten the WC cycle of the merchants. Shortening the cash cycle of merchants helps them in re-stocking and increasing revenue quickly. By the virtue of having access to the sales trends data of merchants on the marketplace, EF providers have been able to ensure low default rates through robust data-driven underwriting.
3) Supply Chain Finance: While invoice finance has existed for a while but has only been tech-formalised recently. Invoice financing helps the suppliers in not only reducing their WC cycle but also their cost of funds by piggy-backing the higher credit rating of the large corporate buyer. In an invoice finance transaction, the lender takes a credit exposure on the better-rated buyer, the buyer negotiates better terms from the seller, and the seller gets upfront money, a win-win for all.
We at Fasanara Capital have partnered with 100+ FinTech Lending platforms and have helped them with both equity and credit facilities for their financing innovation and scaling up their existing products. If you are a FinTech Lender with a unique lending product, do reach out to us.