Two out of three working-age individuals globally earn a living through micro, small, and medium enterprises (“MSMEs”), and yet the COVID-19 pandemic has devastated these entities. MSME recovery is imperative for the creation of jobs and the resiliency of local communities. One critical need is flexible financing to pave the way for recovery and long-term stability. Revenue-based financing (or “RBF”) offers one option for funders to provide this type of flexibility, and its deployment has accelerated in the past year.
A growing number of impact investors — Upaya Social Ventures, Adobe Capital, Viwala, and GetVantage among others — have piloted RBF instruments in some of the world’s hardest-hit communities. Their experiences highlight the potential for creatively-structured capital to provide much-needed stability during a large-scale crisis.
One critical need is flexible financing to pave the way for recovery and long-term stability.
What is RBF?
RBF is unsecured debt financing where repayments are entirely variable and based on revenues. RBF funders use historical revenues to determine if a company qualifies for a loan and projected revenues to understand the affordability of payments. Other calculations such as EBITDA or gross profit can be used in lieu of revenues, but do add complexity to the transaction.
RBF is a growing trend in the U.S. and Europe with one of the largest providers in the world, U.S.-based ClearCo recently having raised $100 million to fuel its growth. RBF is relatively new to emerging markets and a very new tool for impact-focused funders.
How a revenue share loan created a bridge out of crisis for a rural India-based MSME
Upaya is an early-stage investor in small and growing businesses in India. It invests with a mission to create stable, dignified jobs for the poorest of the poor. Over the past decade, Upaya has invested in 26 businesses that have collectively created over 22,000 jobs in otherwise marginalized communities.
Like many other impact investors, Upaya has traditionally invested by taking an equity stake or through convertible notes. When India announced its lockdown in late March 2020, however, and all business ground to a halt, the Upaya team felt its standard products were ill suited to the need of the hour: liquidity. With the help of a small group of committed funders, in less than a week’s time, Upaya pulled together a $100,000 “stabilization fund” that stood ready to deploy revenue-based loans on an emergency basis for cash-strapped portfolio companies.
Tamul Plates was the first to avail of this facility. Headed by Arindam Dasgupta, Tamul employs over 2,000 workers across the state of Assam in northeastern India to manufacture and distribute leaf-based tableware — plates and bowls that are environmentally-friendly and a good alternative to plastic and styrofoam products. Before COVID, Dasgupta was happy with the steady orders that were coming in.
“Even in a bad month, we would have hit revenue of about Rs 15-odd lakhs ($20,000 USD) and in a good month we would have crossed somewhere between Rs 20-30 lakhs ($25,000 – $40,000 USD),” said Dasgupta. “Almost every month [prior to the pandemic] we were doing an export order … we had reached that place.”
Revenue-based financing (or “RBF”) offers one option for funders to provide this type of flexibility, and its deployment has accelerated in the past year.
Upaya was one of two investors who were the first to invest equity in Tamul, back in 2015. But Tamul’s steady growth had recently attracted the attention of other investors, and in March of 2020, Dasgupta was on the verge of closing a follow-on equity round. He did not disclose the amount of the commitment, but said it would have more than satisfied Tamul’s need for Rs 50 lakhs ($65,000 USD) of liquidity.
But then India’s lockdown was announced and suddenly the deal was cancelled. Overnight, Dasgupta went from planning a business expansion to a desperate fight for business survival.
Fearing immediately for the hundreds of Tamul jobs that were in jeopardy, Dasgupta launched a crowdfunding campaign that successfully raised Rs 28 lakhs (~$37,000 USD) that was distributed as aid to 1800 workers’ households. But he knew this was a temporary stop gap.
“If we were able to continue the business, then we could support our communities over the longer run,” he said. But he felt stuck. He already had a significant amount of debt on his books, and no one was offering equity. How would he get his business running again?
Heading into May each year is the start of the raw material collection season. In this 6-8 week period, workers across Tamul’s network are paid to collect and process native palm leaves. If Tamul missed this short but critical window, it would essentially forego any production for the rest of the calendar year.
Upaya approached Dasgupta in early May with the offer of a revenue-based loan: Rs 20 lakhs ($25,000 USD), with a 6-month grace period, taking a 5% share of monthly revenue, across a 36-month period. Upaya proposed a 1.1X multiplier, meaning that the total amount repaid would be capped at Rs 22 lakhs.
Dasgupta was initially reluctant to take on more debt, but the hybrid instrument intrigued him, and the terms seemed far more reasonable than other options.
“The product structuring was very good. The [implied] interest was low,” said Dasgupta. “We had been working with very high interest rates from NBFCs because other options were not available to us. That’s been the primary reason for us having a high fixed cost within the company.”
He was especially encouraged by the revenue-linked repayments. Unlike traditional debt, wherein interest payments are due regardless of business performance, Upaya’s loan repayments were only due if and when sales picked up again. According to Dasgupta, “that gave us confidence that we would be able to service the loan.”
Taking Upaya’s loan gave Tamul the shot of liquidity it needed, and the company was able to take advantage of the May-June raw material collection season. By the end of 2020, orders were picking up again, though not quite to pre-pandemic levels. Dasgupta negotiated a 6-month extension on the grace period — that Upaya granted — a move that paid off when the second, more brutal, COVID surge swept through India in April 2021 and halted business again.
Despite the severity of the second wave and its setbacks, Tamul made its first repayment to Upaya this June, based on its May revenues, and Dasgupta is optimistic.
“I’m very happy that I took the decision of taking that loan,” he said. “COVID has brought out more confidence in us, what we were not able to see during normal circumstances. We now have to work harder to expand on this. The entire team has shown a lot of spirit. I have been very satisfied by Tamul’s response to this entire situation.”
RBF as a growth catalyst for technology enabled companies
While COVID has wreaked havoc on traditional business models such as Tamul, it has also created an exponential shift in consumer behavior towards digital consumption in India and other emerging markets. There are now more than 500,000 Indian MSMEs that have digitized their offerings. Unfortunately, these MSME’s struggle to access the capital they need to ramp up their growth through development, advertising, customer acquisition and working capital investment. If the companies are lucky enough to attract equity investors, the process of selling ownership can take months and there is a fundamental mismatch between selling long-term ownership in the company for short-term capital needs. Traditional debt is difficult for these companies to obtain as banks are reluctant to lend to fast growing MSME’s without traditional collateral or what they deem to be a sufficient credit history.
For funders interested in exploring RBF, it is most suitable for post-revenue, early-stage to growth-stage enterprises that need to access working capital and growth funding.
GetVantage, which was launched in 2019, has stepped into this gap by offering RBF to fast-growing digital businesses in India. During COVID, it has seen demand skyrocket from local brands capitalizing on the countrywide shift to ecommerce. In the past twelve months, they have funded over 60 such brands as well as raising their own round of funding from investors of $5 million in a mix of equity and debt. Their loans range from 2 lakhs ($2,500) to 2 crore ($250,000) and are all executed via their own proprietary fintech platform.
“As a founder’s platform, GetVantage helps high-potential founders and brands supercharge growth with performance-based financing as a catalyst,” said Bhavik Vasa, Founder & CEO, GetVantage. “We are proud that 40% of our portfolio is female founded companies and first-time founders.”
Due to the nature of RBF, GetVantage’s borrowers that experienced a significant decrease in their revenues saw their repayment decrease as well, so the financing continued to be affordable. However, according to Bhavik, “most of our portfolio online brands have surged in demand and revenues during these times”.
When is RBF appropriate?
We can see that Upaya and GetVantage seek to serve very different parts of the entrepreneurial ecosystem in India, but the use of RBF for both shows its versatility and the broad demand for flexible, non-dilutive capital for MSME’s.
For funders interested in exploring RBF, it is most suitable for post-revenue, early-stage to growth-stage enterprises that need to access working capital and growth funding. These organizations may be unable to access secured debt financing due to a lack of collateral or may need to access funding that is more flexible than bank financing. Having an additional option for working capital beyond traditional bank debt, or credit cards, will be essential for many businesses to be able to rebuild and/or survive post-COVID.
As a funder, you need to determine your own priorities around how to apply RBF in different situations, geographies and types of companies. Just because RBF agreements are not suitable for early-stage, pre-revenue companies, it does not mean that they are not suitable for very small companies as we can see through both Upaya and GetVantage. But in order to create access for smaller companies, the cost of diligencing and distributing the loan needs to make sense, which is where technology becomes essential.
From an affordability perspective companies evaluate potential borrowers based on their ability to repay the loans within a relatively short time frame. Simplicity, transparency and affordability are paramount to making this work and using technology to automate this process is ideal. If you are a founder considering an RBF agreement, you’ll need to have a solid understanding of the affordability of the capital offered, both from a percentage of revenue and from a total repayment amount. For this you’ll need to compare the cost of the deal with other viable alternatives. The comparison should be based on total cost to you as an entrepreneur as well as the flexibility that the funding provides.