Every business needs capital. But raising capital is much harder for small- and medium-sized Enterprises than for larger, better established businesses. Most small businesses get funded by the entrepreneur – they use savings, credit cards, or sometimes they ask friends and relatives to help. When they can, they take on debt, whether it be from banks or from other sources. Today, digital companies are disrupting the traditional capital raising processes in India. Here is why:
The most classic form of finance is debt. A bank or other lender accepts collateral and lends you what the collateral is worth. Debt finance is expensive and comes with many onerous conditions. The difficulty is that many, perfectly viable small businesses do not have sufficient collateral. The result is that 80-90% of their loan applications are rejected.
High-End Digital Technology for SME credit
Today there are alternatives. One alternative is the establishment of companies like Capital Float and LendingKart – these are online credit evaluation platforms which, based on credit evaluation – and not on collateral – provide loans to SMEs. They make extensive use of analytics, algorithms and technology to make lending decisions quickly based on verifiable sales data obtained from eCommerce websites. There are also companies like Faircent, Mandii which provide an online marketplace for borrowers and lenders to meet and transact. These companies are backed by some of the top notch VCs such as SAIF, Mayfield, Sequoia, etc because of the whole new market these companies are creating. Startups which typically raise equity financing are warming up to the concept of venture debt, with companies like SVB Finance and Trifecta Capital offering debt to funded startups on attractive terms.
Still another very attractive alternative is equity financing, obtaining capital by selling shares in a company. Many SMEs are concerned about equity financing, because it means giving up partial control of the new company. They stick to traditional debt financing despite its challenges. But equity financing offers great advantages such as alignment of investor’s interest with your success, flexibility of use of funds and repayment from earnings.
Startups, on the other hand, have fully leveraged equity financing because of the advantages it offers. Angel financing has grown enormously over the past few years – thanks to the proliferation of startups. Currently, the rate at which angel and venture capitalists are funding startups in India is fascinating. Companies like Tracxn, LetsVenture, AngelList (again backed by top VCs in the world) are great platforms for startups to access angel investors.
The success of startups with equity financing has led it to become more popular with SMEs – they have begun to see it not only as a viable funding option but a preferred method of raising capital. We, on our platform, see a great deal of interest from SMEs seeking strategic investors who can offer equity financing opportunities. There are several players who are attacking different segments of the spectrum. For example, BankerBay focuses only on $5 million plus EBITDA companies; Grex is a private stock exchange platform for unlisted companies. The equity capital raising market is too broad to be solved by a single player.
Thanks to the advantages technology offers to the fundraising process, these new forms of finance are changing the marketplace. And new alternatives based on technology, like crowdfunding, may soon become available with changes in regulation. It’s inevitable that technology disrupts the capital raising industry, and the process has only just begun.
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