New age enterprises or start-ups are faced with the dilemma of finding the right mix between dilutive and non-dilutive forms of capital. Non-dilutive capital refers to any capital a startup raises that does not require dilution of equity or ownership. This is dilemma is exacerbated by unavailability of quality advice on such matters.
Dilutive capital raise includes:
Venture debt (in the form of warrants)
Mezzanine financing (may have participation rights in the equity of the company)
Non-dilutive capital raise includes:
Bank/ NBFC debt (working capital loans, supply chain financing, term loans etc.)
Revenue based financing
Export / receivables Factoring
Raising capital in an optimal structure can create a substantial upside for founders and early backers. Over a period of 3-5 years incremental dilution can be reduced with every follow-on equity round. The idea is to be able to utilize more of non-dilutive capital to achieve business goals.
Under the non-dilutive capital raise umbrella leasing and factoring are two interesting options for new age enterprises. Leasing and factoring are not categorised under direct debt exposure and do not form a part of monthly repayment obligations of debt unlike Structured debt / Venture debt.
Leasing: A start-up with consistent support from its equity backers can opt for leasing of its IT assets and other office infrastructure. Additionally, any investment in plant and machinery can also be funded via. long term leases of 9 to 15 years. This defers immediate blockage of expensive equity proceeds to meet such lump sum investment requirements. Leasing makes the overall business asset-light and enables expenditure to be booked on lease payments.
Factoring: For any new age enterprise providing goods and services to large e-commerce companies, reputed conglomerates, export houses and large international clients, factoring facility helps to de-leverage the balance sheet and improves cash flows. Start-ups can avail domestic and export factoring from several factors.
Factoring can also help improve ratios used to evaluate the credit risk associated with any direct exposures. Factored receivables will appear as a contingent liability, if the structure is with re-course otherwise receivables simply get relaced by cash on the balance sheet. Factoring increases the available unencumbered cash and thus also help in runway extension efforts.