Here's When Indian Startups Should Opt for Traditional Bank Loans Over VC Money

While the industry has spoken enough about the funding winter and cash crunch at startups in 2016, venture debt firm Innoven Capital has come up with a solution to aid such woes at startups.

InnoVen launched "InnoVen Capital Assistance Program' to facilitate specialty debt financing for startups from its partner banks, earlier this month. The program provides access to conventional debt from various banks and NBFCs by undertaking credit risk on behalf of their portfolio companies. Innoven Capital has formed a syndicate of banks and non-banking financial companies (NBFCs) including IndusInd Bank, RBL Bank, Standard Chartered, Tata Capital and SIDBI to extend credit to its clients.

Entrepreneur India asked Vinod Murali, Managing Director of InnoVen Capital as to how he believes debt financing could be an important source of finance for startups over traditional VC and angel funding.

"There is a newfound interest in Startups for banks largely driven by the growing visibility of several success stories like Flipkart, Ola, Snapdeal etc. This segment offers banks a new commercial opportunity but also needs a high level of dedicated resources and increased risk appetite. Further, the impetus from the Prime Minister Narendra Modi and his office has spurred various arms of the government to also help fuel this momentum which has resulted in several PSU banks showing increased intent," Vinod said.

Traditional banks aren't very comfortable in shelling out loans to nascent stage startups simply due to the lack of credit history. However, InnoVen claims to have had the advantage of tracking and having dialogues with companies from very nascent stages which ensures there is a relatively higher level of familiarity with founders and the business models involved.

Traditional bank loans over VC money – how does one have an advantage over the other?

Startups are mostly seen seeking VC funding and have often accused of over splurging these funds. In this case, debt is always cheaper than equity. "...Usage of debt needs to be well understood and over leveraging a company is not ideal. Also, in many instances the risk may be too high or binary in which case it is better for the company to opt for equity financing,"

"The challenge for debt has been the requirement of hard, tangible assets and profitability which startups cannot support as they are typically service companies with high growth aspirations which results in losses for the short-medium term. InnoVen is functioning as the interlocutor between Startups and Banks/NBFCs to ensure there is appropriate dialogue which results in flow of inexpensive capital, with the right structure and controls," he adds.

The firm roughly estimates, 15-20% of InnoVen's portfolio companies are expected to qualify for this program, which could translate to financing of $15-25 MM for these young companies in 2017. This also depends on the partner institutions finding their comfort with the startups involved as they have to bear some risk ultimately, Vinod adds.