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Do the debt use cases differ depending upon the sector in which a start-up operates?

Updated: Aug 1, 2022

Every sector has a traditional operating mechanism. The need to build a solid foundation for growth necessitates utilising debt capital along with equity. The use cases for debt may vary depending on the sector in questions, but debt is now available for most major startup segments.

Agritech: In Agritech, debt can be used for funding farmers, monetising warehouse receipts, financing Agri inputs and monetising Agri output. Certain categories of exposure in this space can be categorised under priority sector lending depending on the beneficiary. The space has several well-funded start-ups including a few Unicorns thereby reflecting consistent support from equity investors.

B2B platforms: One of the key considerations for any B2B business is efficiency in supply chain. In this segment debt can be used to manage the incremental working capital requirements, options include vendor financing, sales invoice discounting, revolving demand loans and interest only credit facilities. The space has witnessed the birth of several Unicorns with a few even exploring creation of an NBFC arm to deepen the value creation across the eco-system.

D2C businesses: India is currently seeing a surge in D2C brands across various categories as well as creation of Thrasio style platforms like Mensa, Upscalio, GlobalBees, etc. D2C brands continue the category expansion exercise with every equity infusion and need consistent debt support to manage the inventory holding period, MOQs & lead times from contract manufacturers, import of various inputs and managing the vendor base effectively. With most D2C brand customers payment for products upfront, debt facilities can be critical in managing the supply side overall.

Domestic Logistics: Inter-city and Intra-city logistic providers cater to large e-commerce players, traditional large corporates, and emerging brands on one end and fleet owners on the other. They increase the efficiency of vehicle deployment and deliveries using technology. More evolved start-ups in the space have expanded the product suite to warehousing and 3PL under one roof. For companies in this segment apart from venture debt, sales invoice financing, driver financing, leasing, etc. can create a significant stakeholder value.

Ocean Freight Logistics: Startup incumbents in this space can use various debt structures such as export factoring, purchase financing and eventually offer trade finance options to their SME clients.

Used Car platforms: This is a segment with 3 Unicorns and a listed start-up in the Indian context. The businesses rely on debt to finance their dealer / distribution network, buy used car inventory, and manage other working capital requirements like investments in spare parts. The consumer also avails debt to purchase vehicles. Efficient debt management can prove to be remarkably effective in expanding business and improving margins in the overall business.

EV Businesses: Electric Vehicle space is an important sector and is supported by policies like subsidies for end consumer and categorizing direct exposure taken by financing institutions under priority sector lending. The space has seen start-up incumbents in three broad categories viz. Battery technology, complete electric vehicles and those creating charging infrastructures. Support from lending institutions will play a crucial role in evolution of the space with most incumbents in pre-production / launch stage. In this sector, debt would be required for setting up factories / assembly lines, spare parts, charging infrastructure setup, financing the vendors and purchase of the finished products by the end customers. The sector will witness substantial number of unicorns as well as decacorns over the next decade.

SaaS based business: SaaS based businesses can be viewed as businesses with annuity inflows from period ranging from 18 – 36 months depending on the underlying contracts. Here a debt financing institution can discount the fixed inflows (both INR and FCY) of next 12 / 24 months thereby providing immediate cash injection in the business apart from more traditional debt options like CC / OD. Further, start-up incumbents in this space have the option of revenue based financing to meet their working capital requirements.

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