Dena Bank’s ‘smallB’ brings debt financing to the door of start-ups
This is the first time that a nationalized bank has created a separate branch for financing start-ups
Mumbai: Earlier this year when Avneet Makkar thought of raising funds once again for her start-up CarveNiche Technologies Pvt. Ltd, she chose to raise debt instead of approaching a venture capital (VC) investor with the intention of seeking higher valuations and not diluting too much stake in her company.
In March, CarveNiche Technologies raised debt financing of ₹ 1 crore from Dena Bank Ltd’s ‘smallB’ branch, an initiative that offers debt funding to start-ups. This is the first time that a nationalized bank has created a separate branch for financing start-ups.
“With smallB, the payment starts after a couple of years and that gives us time to build up the firm," said Makkar, co-founder and president-business strategy and operations, CarveNiche Technologies, adding the company would look at raising $5 million (around ₹ 30 crore) in the next round.
For start-ups, getting capital between the angel and Series A rounds is a difficult exercise because funding avenues are limited. Typically, these companies are too small for VC investment and too large for angels to back them.
Angel funding refers to small cheque investments by high net-worth individuals or industry experts in a business idea while Series A refers to the first round of funding by VC investors. To be sure, debt is what start-ups are looking for. The nine-month-old smallB branch of Dena Bank has backed seven start-ups till date, giving term loans of ₹ 50 lakh to ₹ 1 crore each, including Belita Retail Pvt. Ltd, CarveNiche Technologies, Cherish Life Products Pvt. Ltd, EduSports Pvt. Ltd, Mobile Technologies and RedQuanta. It now gets five-six queries daily, Makkar said.
The branch does not have a designated corpus to back start-ups and the loans provided by smallB are covered under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up by the Small Industries Development Bank of India (Sidbi) and the government of India.
The banking system in the country has not been able to adequately address the financing needs of start-ups, particularly in knowledge-based enterprises, as these firms often do not have tangible assets and take a longer period to achieve break-even. SmallB will offer term loans of five-seven years at 12.5% to fledgling firms in manufacturing and services.
“SmallB’s precondition is that it will offer loans only to those companies that have angel, angel network or VC funding. It works only with Sebi-registered Indian funds," said a person close to the development, who did not want to be identified. Sebi is the Securities and Exchange Board of India, the capital market regulator. Loans from smallB have to be personally guaranteed by promoters. While it doesn’t have any non-performing assets (NPAs), it has drawn up procedures for contingencies such as the non-payment. This extends to liquidating the assets of the company.
Meanwhile, start-ups that have raised debt from smallB say the option to raise more debt from the parent bank is another advantage.
MobiQuest, which raised debt from smallB, has deployed the money into initiatives to increase customer engagement. “We are now on a look out for our Series A funding and needed a credit line available to continue our growth," said Vineet Narang, chief executive, MobiQuest.
Angel investors say there is a shortage of fund-raising avenues for start-ups in the seed stage and many firms get stuck over last-mile funding, leading to an early death.
“Start-ups often face last-mile capital constraints for reaching out to customers, finishing an offering or a product in the making. This debt funding changes that all," said Anil Joshi, president of Mumbai Angels. He is currently recommending two more start-ups to smallB.
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