Venture Debt and Credit Options for Start-ups in India

As the Indian start-up ecosystem grows, alternative financing options like venture debt, corporate credit cards, and inventory financing have become increasingly popular. These financing tools allow start-ups to optimize cash flow, manage operational expenses, and scale effectively without diluting ownership. Below is a detailed exploration of each option and how they benefit different types of start-ups.

The venture debt market in India has experienced rapid growth, jumping from $800 million in 2022 to $1.2 billion in 2023, with a projected market size of $1.8-$2 billion by 2026. This growth is driven by an increasing number of start-ups seeking non-dilutive financing options to supplement equity investments, maintain operational liquidity, and extend their cash runway without diluting ownership.

Several prominent venture debt funds have emerged to support start-ups in India.

Stride Ventures: Founded in 2019, Stride Ventures focuses on providing venture debt to start-ups across sectors like consumer services, mobility, and eCommerce. They have raised over $314.1 million and have supported more than 100 start-ups.

Trifecta Capital: One of the oldest players in this segment, founded in 2015. Trifecta has funded start-ups such as BigBasket and BharatPe, offering both debt and advisory services.

Alteria Capital: Established in 2017, targets start-ups from Series A to Series D with ticket sizes ranging from $100,000 to $15 million. It has a diverse portfolio spanning edtech, health tech, and consumer brands.

Innoven Capital: With a history dating back to 2008, has backed 200+ start-ups, including several unicorns like OYO and BYJU'S. It offers funding for early-stage and growth-stage start-ups.

Nuvama Asset Management (formerly Edelweiss): has a large AUM of ~$8 Billion, focusing on structured debt solutions for growth-stage companies.

While venture debt funds are more common, some Indian and multinational banks are also actively venturing into this space:

HSBC: has been a very active participant in the start-up segment, offering digital-first products tailored to new-age businesses. HSBC has committed a $600 million balance sheet allocation for providing non-dilutive working capital solutions to tech start-ups. This capital allocation is part of HSBC's broader strategy to support high-growth, innovative start-ups with flexible funding options.

HDFC Bank: has a specialized vertical for structured finance and offers venture debt facilities for growth-stage companies. The bank focuses on companies with predictable cash flows and those in the consumer services and fintech sectors.

Axis Bank: provides venture debt facilities to start-ups, typically after they have secured Series A funding and demonstrated business viability.

ICICI Bank: the focus is primarily on structured lending for tech and digital-first businesses. They offer credit lines, working capital, and equipment financing.

Standard Chartered Bank: An MNC bank that provides venture debt for start-ups across sectors like healthcare, fintech, and digital services. The venture debt solutions are often part of a larger corporate banking relationship.

?

Program Highlights and IRR

Interest Rates: Typical interest rates range from 10% to 18% per annum & in some cases it can even go as high as 24% depending on the start-up’s risk profile and stage.

Warrants and Equity Options: Many venture debt deals include warrants, allowing lenders to buy a small equity stake at a future date, which helps balance risk and reward.

Flexible Repayment Terms: Repayment is often structured as interest-only for the first 6-12 months, followed by principal and interest payments. This structure provides start-ups with the cash flow flexibility they need to scale.

Venture debt is best suited for start-ups in the growth or expansion stages—typically after a Series A or B funding round. At this stage, companies have established a product-market fit and have a steady revenue stream but may need additional capital to extend the runway, finance acquisitions, or meet working capital needs.

Other tools can also be deployed independently or clubbed to create a more comprehensive framework enabling businesses to grow unhinged & ensuring better cash flow utilisation.

Credit Cards for Start-ups: Business credit cards are a versatile tool for managing day-to-day expenses, optimizing cash flows, and earning rewards. They provide a flexible line of credit that can help start-ups maintain liquidity while covering smaller operational costs like travel, supplies, and digital marketing. Some cards also provide additional benefits around various usages, including lease payments, travel etc.

Popular Options:

HDFC Business Moneyback Credit Card: Offers cashback rewards on everyday expenses, making it ideal for start-ups looking for tangible returns.

Citi Corporate Credit Card: Includes expense management tools, high credit limits, and a comprehensive rewards program. Suitable for start-ups with international operations due to global acceptance and flexible spending options.

Axis Bank My Business Credit Card: Provides customizable spending limits, reward points, and online account management, making it an excellent choice for small-scale businesses.

American Express Platinum Travel Card: Tailored for start-ups with frequent travel needs, providing significant travel rewards, lounge access, and concierge services.

HSBC Unsecured/partially secured Corporate Cards with a limit of up to 25L

Using business credit cards allows start-ups to build a credit profile, access short-term capital, and manage cash flow efficiently. These cards often come with added perks like zero annual fees for the first year, reward points, travel benefits etc.

?

Inventory Financing for D2C Brands

Inventory financing is a short-term loan designed for product-based businesses to purchase inventory. It’s particularly useful for D2C (Direct-to-Consumer) brands that need capital to stock up on inventory before high-demand seasons or to expand their product lines. Inventory financing is ideal for inventory-heavy businesses that need to buy in bulk, access supplier discounts, or bridge cash flow gaps during slow sales periods.

Fintech platforms like Velocity provide quick inventory financing solutions to D2C brands. They offer customized credit lines that scale with the business’s cash flow, allowing brands to repay based on revenue.

BlueVine and Funding Circle offer inventory financing with flexible credit lines ranging from $250,000 to $5 million.

?Helps start-ups maintain optimal inventory levels, ensuring they never miss out on sales opportunities.

Enables D2C brands to access bulk discounts and grow inventory without straining cash flows.

?

Debt Financing for SaaS Companies

SaaS companies often have predictable recurring revenue streams, making them ideal candidates for debt financing. This form of financing allows SaaS start-ups to cover operational expenses, such as payroll, marketing, and R&D, without diluting ownership.

Ideal for scaling SaaS start-ups with recurring revenue but who need additional capital to invest in new products or markets.

Velocity has announced a ?300 crore ($36 million) fund specifically targeting B2B SaaS start-ups, offering growth capital in a fully digital process that can be completed within 72 hours.

?SaaS start-ups can use this capital to fund growth without impacting their cash reserves while leveraging predictable revenues for structured repayments.

?By leveraging the right mix of these financing options, start-ups can optimize cash flow, scale effectively, and achieve long-term sustainability.

?

Specific Use Cases?

Working Capital Needs: Start-ups like OYO and BigBasket have used venture debt to maintain smooth operations and finance inventory without impacting their equity structure.

Expansion and Scaling: Sugar Cosmetics utilized venture debt to finance geographical expansions and marketing campaigns while retaining control over their business.

Capex and Strategic Acquisitions: Venture debt has enabled companies like Good Glamm to acquire smaller firms, enhancing their market presence.

Challenges and Risks

Higher Interest Costs: Compared to traditional bank loans, venture debt carries higher interest rates, making it more expensive for start-ups with less predictable cash flows.

Risk of Over-Leveraging: Start-ups may over-leverage if they do not maintain a healthy debt-to-equity ratio, leading to financial strain during downturns.

Potential Future Dilution: Although less dilutive initially, warrants attached to the debt can lead to equity dilution if exercised by lenders.

Choosing the Right Financing Tool is of utmost importance start-ups should evaluate their stage, capital needs, and growth strategies when choosing between venture debt, credit cards, and inventory financing.

Each tool has its unique advantages and is designed to meet different business needs:

Venture Debt: For growth-stage start-ups looking for non-dilutive capital.

Business Credit Cards: For managing short-term operational expenses with the added benefit of rewards.

Inventory Financing: For D2C brands looking to optimize stock levels and cash flow.

SaaS Debt Financing: SaaS companies need capital to fund expansion while leveraging their recurring revenue.

Venture debt has emerged as a robust financing tool in India’s start-up ecosystem, offering non-dilutive growth capital. With increasing support from both dedicated venture debt funds and banks like HSBC, the availability of such financing is likely to grow. Start-ups seeking to scale operations, finance acquisitions, or bridge equity rounds without diluting ownership should consider this option, keeping in mind the associated costs and the need for strategic use of debt.

#VentureDebt #StartupFunding #GrowthCapital #NonDilutiveCapital #BusinessFinance #CorporateCreditCards #D2CBrands #InventoryFinancing #SaaSFunding #CashFlowManagement #ScaleWithDebt #WorkingCapital #DigitalLending #StartupGrowth #AlternativeFinancing #FinTechSolutions #FinancialPlanning #StartupsIndia #BusinessExpansion #TechStartups