November 24, 2015

Debt as a Funding Option for Indian Startups

From an article on the IIM-A CIIE blog based on the experience of Flick2know and Revive, two incubatee companies of CIIE which have recently raised debt fund for their ventures (both from SIDBI):
Typical private debt funders provide loans in the range of Rs.5-25 crore per transaction at an interest rate of 15-17%, while govt. and govt. supported institutions provide as low as Rs 1 crore per transaction with interest rates starting from 9% for startups...Siddharth, for example, recounts from his recent experience of raising debt from SIDBI. Initially, they were hesitant about considering Revive, given the non-generic business model even though they had a revenue model in place. Revive took almost 1.5 years to raise debt from SIDBI under a scheme which is co-supported by DST for MSMEs with an interest rate of 5% per annum, although earlier they were considering to go with the Credit Guarantee Scheme.
As far as the criteria of selection is concerned, Divir mentions that unlike equity funders which look for startups with high growth trajectory, debt funders often seek a business that has minimum risk and proven financial performance. Siddharth adds, “debt-fund providers tend to prefer the ones with considerable market traction.” At the very least, there will be intensive scrutiny of last the three years financials, fine detailing of the projected financial model, and statutory compliance checks...“Patience is the key,” says Divir. One has to be clear why the fund is being raised with a clear utilization plan, and once the process commences, one has to patiently cooperate with the funding agency through the long-drawn process that debt funding entails. One also has to be ready for the extensive documentation and reporting that must be done during the life of the debt fund raised. “Lastly, a startup should only raise what it requires in debt, not a penny more, not a penny less,” he concludes.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.