The COVID-19 crisis-induced significant shifts in consumer behaviour, supply chains, and routes to market are knocking businesses off balance. Amidst such a situation, companies are opting for alternative lending options to maximise business growth. In light of it, we spoke to Poorva Gupta, Head – Growth Capital, KredX, about the impact of COVID-19 on businesses and the consequential shift to alternative lending options. Here’s an in-depth article co-authored by Poorva Gupta & the KredX Editorial team.
The last few months have been challenging – both for businesses struggling to stay afloat as well as financial institutions challenging themselves to support these businesses. For some of us in the industry, these are the precursors to the first major crisis of our careers. But even those who have been through at least one if not two crises before this, are waiting for this to unfold before they can comment on its severity. However, while demand remains largely focused on essential services and physical distancing continues to be the only way to beat the pandemic, there’s still a lot to be optimistic about.
We say this also because our experience of working with businesses on their financing needs over the last few months (even during complete lockdown) has shown that barring a few unfortunate sectors, as long as businesses had their core values and fundamentals in the right place, delays in repayments did not mean recovery was not possible.
At KredX, we have always believed that financing should not just follow, but should also facilitate the growth of the businesses that we support. Specifically to this end, our Growth Capital vertical focuses on innovative solutions to help bridge the gap of funding that businesses need for long term spends over a six to eighteen month period. In one such offering, we recently started working with SaaS companies to provide alternative fundraising options apart from traditional equity raises. Through this blog post, we’d like to share some of those learnings which will hopefully help SaaS entrepreneurs and businesses looking to develop or restructure their fundraising strategies.
As asset-free businesses, the biggest goldmine that most SaaS companies sit on is their enterprise contracts. These contracts define the length, frequency, and quantum of the compensation they can expect to receive for the services that they provide to their clients. It is this “recurring revenue” which SaaS businesses receive from their sticky clients that can help debt providers take a bet on their business despite the lack of traditional collateral and business models.
One such option, for example, is revenue-based financing. Through this solution, businesses can raise money by pledging a percentage of their future revenues in exchange for upfront cash today. This involves a more rigorous evaluation of the business’s cash flow and transaction history than standard underwriting and funding amounts can be calculated on the basis of the current monthly or annual recurring revenue from top clients. The structuring can be secured or unsecured depending on the risk inherent in the transaction.
Such lending models can specifically help businesses with scattered receivables from hundreds or thousands of customers with different types of subscriptions or pay-as-you-use revenue models. Since the assessment is on the basis of your historical and forecasted cash-flows, individual revenue contributions may not matter. At the same time, the growth capital can be used to ease out any irregular cash flow patterns or working capital concerns and help streamline day to day operations.
Evaluation models vary, and while some focus on past transaction histories, others might be hinged more on future revenue potential from large client onboardings, while others might still focus on bridging specific types of spends that a business might be incurring. Repayment structures can also be different – fixed EMI models (irrespective of monthly or quarterly revenues) versus a fixed percentage of monthly revenues. Ultimately, what helps both lenders and borrowers is if businesses go in with defined use of proceeds plans and a clear idea of how such a growth capital influx can help them take their business to the next level. Another thing to keep in mind is that the more realistic the targets set, the better since most lenders will want to hold entrepreneurs and companies to the plans that were used at the time of evaluation.
Lastly – data is obviously the queen in any such transaction. Post disbursal monitoring, pre and post sanction risk decisioning, automated data aggregation – most lenders have worked a great deal on optimizing these processes to be able to transact at scale. This goes to the extent that API integrations are now possible not just with banking or payment gateway partners but even with individual borrowers to access authentic data. Such integrations not only reduce the need for manual monitoring and hence human error but also allow lenders to offer much better terms and significantly more funds. Or in other words – the much-used banking term “limits” no longer holds much meaning.
So while we all settle into our “new normals” and wait to see what a post-pandemic world will look like, one thing is for sure – there’s much innovation to look forward to.