SAIF Partners, a venture capital and private equity firm which manages over USD 1 billion of investments in India, has announced an investment in Capital Float, a working capital financing company focusing on eCommerce. It provides 3-50 Lac loan to e-commerce merchants, small manufacturers, and early-stage B2B service providers for a period of 1 – 12 months. SAIF Partners is expected to investing USD 1 million in the digital SME finance company headquartered in Bangalore.
provides working capital loans to under-served small businesses in India via a technology-led loan origination and credit underwriting platform. The company was founded in 2013 by Gaurav Hinduja and Sashank Rishyasringa. The company currently works with SMEs across Bangalore, Mumbai, Delhi, and select other cities in India.
Traditionally, working capital financing has been a successful offline business. In India it is very common in small local shop owners, where they seek support of individuals and cottage organisation to finance their working capital needs as short term loan. These loans can range from 2% to 4% per month of interest, however as they get directly adjusted against sales margins, merchants with higher margins can manage these loans.
US eCommerce has also led to evolution of organised players like Kabbage.com that helps eCommerce merchants in US with their working capital needs just like capital float.
But Why do eCommerce need this support is a question?
eCommerce in actuality is a CASH FLOW NEGATIVE business, which means the companies receive the payment against good they sell much before they actual ship the goods. Further they work on credit periods with sellers behind them. Hence typically between sales and actual payment to vendors eCommerce companies can enjoy about 30-90 days of period
So why do they really need working capital support? They would require it for either of following cases
1) Either they want to BUY good upfront for a better purchase rates with vendors – this is a good strategy but it happens in large volumes and puts inventory risk on the eCommerce business
2) They are using their sales cash in marketing and discounting, and require support to pay vendors – which essentially means they use the cash they receive against goods in operating expenses, putting vendor payments at risk, needing support for same.
Is this really justified?
Why would these companies not get Credit / Over Draft Limits from banks?
As eCommerce is a cash flow negative business, it does not have any creditors, hence has no receivables only payable. For a business it is interesting, but not for banks. Banks do not see this good, and such companies doesn’t not qualified for working capital loans.
Hence, the success of capital float is really in helping local cottage, mom & pop, SME merchants to get loan support.
On the other side, Large eCommerce companies can use capital float in an interesting way by getting Capital Float on board as partner to support working capital of its Sellers, vendors, manufacturers, etc.
As like all short term loans the interest rates are quiet high, there seems a very good future of such business models, if they play their cards well.
Ravi Adusumalli, Managing Partner, SAIF Partners, said, “SME lending presents a large and growing opportunity in India. We believe this segment requires a differentiated approach, with a potential to use technology to disrupt existing models. We really like the team at Capital Float and their approach to the business. We look forward to a mutually-fulfilling partnership with Capital Float, as they accelerate their journey to be a leading firm in this segment.”
“SMEs have been chronically underserved by the traditional banking system in India, particularly when it comes to working capital,” said Gaurav Hinduja. “By taking a technology-driven approach, we are able to offer such businesses a unique set of cash-flow based lending products in a timely and efficient manner.” Sashank Rishyasringa further explained, “Even today, many entrepreneurs prefer to borrow from informal sources for their convenience and speed. Our goal – simply put – is to make the process of getting a business loan as simple as shopping online. We are excited to partner with SAIF, and believe that their experience building world-class digital businesses in India will be invaluable in this journey.”
Capital Float is a Non-Banking Financial Company (NBFC). The company secured an initial round of angel funding earlier this year, and in June 2014 it announced a seed investment of USD 2 million from the Aspada Investment Company. Aspada is backed with a significant commitment from the Soros Economic Development Fund (SEDF).
SAIF Partners invests in growth as well as seed stage companies across sectors such as internet, technology, ITeS/KPO, consumer products and services, financial services and healthcare. SAIF Partners has a portfolio of over 30 companies including Makemytrip, JustDial, HomeShop18, One97, Speciality Restaurants, Havells, Karur Vysya Bank, Mindtree and IPCA Laboratories.
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