Start-ups these days are now focusing more on revenue-based funding. With traditional capital remaining out of reach for many and venture capital funds drying out, there has been an increased prominence of revenue-based funding, says a report by the Financial Express.
“Revenue-based financing, also known as royalty-based financing, is a method of raising capital for a business from investors who receive a percentage of the enterprise's ongoing gross revenues in exchange for the money they invested,” as per Investopedia. In simple words, investors get a share of the business’s gross revenue in return for their investment.
Platforms such as GetVantage, Velocity, and Klub, all established between 2019 and 2020, are stepping in to address the working capital shortage in the market. GetVantage, Velocity, and Klub are all platforms that are focused on revenue-based financials.
A Redseer study named ‘The India Digital SME Credit Report 2023’ from August 2023 estimated this shortage to be over $150 billion. Similarly, the study highlighted that only around 30 per cent of the current $220 billion in credit demand from digital SMEs is being met.
The revenue-based financing product that saw an increase in 2022–23 is seeing a consolidated interest rate in 2024, said Karun Arya, chief growth officer at GetVantage, to Financial Express.
The Financial Express report says that now start-ups are more conscious of the other options that are present, such as venture debt. Start-ups that do not have a proven track record of revenue generation yet use venture debt to raise capital, says Investopedia. “Unlike traditional forms of debt financing, venture debt is typically provided by specialized lenders who are willing to take on a higher level of risk in exchange for the potential for higher returns,” adds the platform.
With revenue financing on the rise, it remains to be seen how it will affect Indian start-ups. However, one thing that should be kept in mind is that, apart from bank loans, revenue financing has a higher rate of return than bank loans, says the Financial Express report.
