Due to the lack of venture capital flow and the high cost of traditional credit, revenue-based financing (RBF), or non-collateralized debt secured by a portion of gross revenue, is becoming more and more popular among startups and digital SMEs.

Platforms like GetVantage, Velocity, and Klub—all of which launched in 2019 or 2020—are swarming to close the estimated $150 billion working capital gap in the market. This is in response to a Redseer study released in August 2023, which states that only roughly 30% of the $220 billion credit demand of digital SMEs is currently being met.

GetVantage’s chief growth officer, Karun Arya, stated, “We are seeing that kind of consolidated interest already in 2024 that we had seen between 2020-23 in our revenue-based financing product.” GetVantage spends between Rs 40 and 45 lakh on average over a period of roughly 12 months.

He continued by saying that the company is expected to produce three times the revenue run rate above FY24 in the upcoming year, more than it has in the previous three years put together. With a $1 million revenue run rate in FY22, it climbed to a $3.5 million run rate in FY24.

For digitally connected enterprises, revenue-based finance offers an alternative form of funding whereby funds can be raised in return for a monthly payback that is based on a percentage of gross revenue, plus a fixed fee that ranges from 8 to 10% of the original amount.

It is typically chosen by businesses with consistent income streams and a strong demand for short-term working capital, like software-as-a-service providers, cloud kitchens, e-commerce merchants, and financial services organizations.

Some of these businesses might not want to give venture investors any equity at all, while others might not be able to get bank loans because they are losing money or don’t have enough collateral.

Venture debt is another alternative form of funding available to entrepreneurs, however it is mainly limited to late-stage businesses supported by venture capital. With a duration of 12–18 months on average and a gross revenue portion that ranges from 5–20%, RBF is becoming a popular choice for many entrepreneurs looking to raise short-term finance.

“Short-term debt products are absolutely going to eclipse venture debt in overall AUM soon, simply because all businesses have working capital requirements but not all of them can access venture debt” noted GetVentage’s Arya. According to a survey by Stride Ventures, the venture loan market in India reached a value of over $1.2 billion last year, a 50% increase from the year before.

Anurakt Jain, co-founder and CEO of Klub, stated that the primary causes of this upsurge, aside from the ongoing equity financing crunch, are a growing awareness of the options available in alternative financing and the quick and flexible nature of RBFs. Klub has seen a 55% increase in the number of investments made by the company annually.

In an interview with FE, he stated, “We are seeing entrepreneurs become more aware of this optionality and even investors recommending RBF, who used to recommend venture debt as the only option.” The company intends to invest Rs 2,300 crore in revenue-based financing as part of its recent expansion into the Middle East.

Investors noted that RBF has a significantly higher internal rate of return than bank loans, but it can also frequently be more expensive than regular lending. Furthermore, small businesses’ monthly cash flow may be negatively impacted by automatic monthly payments that represent a portion of their total sales.

“We’re in the business of pricing risk and we expect a product structure and a return commensurate to that risk. So if there is a higher-risk business, the returns have to be higher risk as well, as long as the return expectations are not egregious,” Jain said.