Experts are predicting that the revenue-based financing opportunity has the potential to grow in the Indian market up to $40-50 billion (which is around $5-8 billion) over the next few years. According to Avendus Capital, the D2C space which is a key aspect for RBF is expected to be a $100 billion opportunity in India only by the year 2025. The stats are amazing and this is the time to explore every aspect of all available debt options ,do you choose to avail lending Collateral based or Dilution free. Let us evaluate your options.
One of the initial aspects of RBF is that it does not require any type of COLLATERAL OR DILUTION. A major risk-free phenomenon for startups, small businesses, or the growing industry. Nowadays early-stage ventures prefer revenue-based finance as they can get access to funds without any form of collateral or equity dilution. So what is Revenue-based financing and why is it Collateral or Dilution free?
Revenue-based financing is also referred to as royalty-based financing (RBF). A capital-raising method in which investors provide working capital to small or growing businesses in exchange for a certain percentage of the total gross revenue (ongoing) of the company. Nowadays, early-stage ventures prefer revenue-based finance as they can get access to funds without any form of collateral or equity dilution. So what is Collateral or Dilution?
Collateral refers to an asset that a lender accepts as security for a loan. Collateral may be any kind of asset, depending on the purpose of the loan. If the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses therefore it acts as a form of protection for the lender as well as minimizing their risk.
Why RBF Doesn’t Require Collateral or Dilution?
Banks often want a guarantee of security for the funds they are lending in the form of collateral. Equity investors receive an ownership stake in one’s company in exchange for funding but with revenue-based financing to receive access to capital, there is no need to give up collateral or dilute ownership shares.
Regardless of the risk banks pose to you, they are primarily looking to minimize the risk to themselves and collect on their investments. They might ask to pledge real estate, inventory, or any other assets which would be very risky for businesses to lose. A person could be in real danger of losing those assets if he/she has any trouble paying the loan back.
Equity financing is risky and inefficient for funding your working capital cycle as too many rounds of it will dilute one’s ownership to the point where it is out of control. A person can lose the ability to determine the best path forward for the company. Even if you retain the power of decision-making, you are forced into making short-term decisions that hamper your company’s future.
RBF’s advantages are manifold but its biggest advantage is that promoters of the borrowing entity do not need to bring neither any collateral even while getting access to much-required funds nor dilute any stake. It ensures that promoters continue to enjoy complete freedom in managing the affairs of the company. It leaves promoters in full control of ownership of their company and doesn’t require them to pledge assets to secure a cash advance. It can be helpful to ventures that cannot get bank funding due to lack of profitability or collateral or any other reason that could act as obstacles.
Companies are assessed on their potential to generate revenue, and you don’t need to give up your security as long as it’s a good opportunity.
RBF firms such as VEDFIN can invest in startups without an extensive credit history by scrutinizing real-time transaction data an in-depth understanding of unit economics and the brand’s potential to grow in short and medium term. They provide flexible, fast revenue financing to eCommerce companies so they can grow faster, all while protecting their long-term interests.