Banks Throw Startups a Lifeline to Tide Over Working Capital Squeeze
Either through assets or book debt; lenders charge 200-400 basis point premium over the benchmark rates
Mumbai: Several private Indian banks, including HDFC Bank, Axis, IDFC, Kotak Mahindra and Yes Bank have started extending short-term credit to meet working capital needs for Ola, Power2SME, Flipkart, OYO, Zinka, Capital Float, investment banker-turned-entrepreneur Falguni Nayar-owned Nykaa and many others, throwing a new credit lifeline to startups starved of equity capital, signalling some sort of maturity in the sector.
“There are business opportunities in funding startups and new generation companies,” said Sidharth Rath, group executive, corporate banking at Axis Bank. “We prefer companies with adequate equity funding, which helps them to have enough liquidity and aids in debt servicing. It has been satisfactory so far.They will grow bigger in future, and some of them will turn out to be unicorns. We too would have higher share of businesses as we are identifying them early,” he said. Axis Bank funds them mostly through letter of credit, bank credit guarantee, bill discounting offering credit support in transaction banking.
The average size varies in a wide range between ₹ 15 crore and ₹ 10 lakh with maturities from one month to two years. Banks price such loans after adding a pre- mium over their respective lending rates based on marginal costs of funds, known as MCLR in market parlance. This could be about 200-400 basis points (bps) over the benchmark rates adding up to about 12-13%.
“Banks should fund working capital for startups and new generation companies. We have started funding the likes of Ola, OYO, Rivigo, which are all funded by wellknown (private) equity funds,” a senior executive from one of the top three pri- vate banks told ET.
Global private equity firm Warburg Pincus backs Rivigo, a logistic startup while Singapore sovereign fund GIC and Japan-based SoftBank part-own taxi aggregator Ola.
Loans are collateralised either through assets or book debt (in the form of equity capital). For a logistic startup plying trucks daily would be assets. In some cases, they may be in unsecured form and equity fund funding the startup sets the benchmark for the lender.
“We got a credit line of INR 25 crores from Axis Bank in December 2016,” said R Narayan, founder and CEO of Power2SME, which is financially backed by Power2SME and marquee investors include Nandan Nilekani. “We also have a SME Financing Program sanction from Axis Bank for Power2Sme customers for INR 50 crores.”
Out of that ₹ 25 crore, the venture debt (term loan) was of ₹ 15 crore and the rest through cash credit limit.
Puru Vashishtha, co-founder WishFin (formerly Deal4Loans), said startups backed by known institutional investors should get better deals from lenders. Banks are comfortable to extend working capital loans when EBIDTA (earnings before interest, tax, depreciation and amortization) is visible.