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Bank loans find favour with start-ups as VC funding dries up

Bank loans find favour with start-ups as VC funding dries up
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First Published: Tue, Feb 03 2009. 01 15 AM IST

Setting pace: Allwin Agnel, founder and CEO, Hemant Mishra / Mint
Setting pace: Allwin Agnel, founder and CEO, Hemant Mishra / Mint
Updated: Tue, Feb 03 2009. 10 27 AM IST
Bangalore: Late last year, when was looking for capital to run its operations for a few months, it opted for the unusual.
Setting pace: Allwin Agnel, founder and CEO, Hemant Mishra / Mint
Allwin Agnel, founder and chief executive of India’s largest online community for aspirants to master of business administration programmes, decided to borrow Rs50 lakh instead of venture capital, or VC, the preferred mode of raising money among start-ups.
With an annual doubling of revenues, raising venture capital would not have been difficult for the firm. But “debt was faster to close than VC funding”, says Agnel of the loan he raised without collateral in Mumbai. “It generally takes four-six months to raise funds from VCs, while it took us two months to get debt.”
At a time when venture capital is hard to come by and terms proposed by financiers are getting tighter, some entrepreneurs are approaching banks for short-term capital rather than turn to VC firms.
In Patna, entrepreneur Irfan Alam has raised Rs80 lakh from banks in the last eight months for his social enterprise venture SammaaN Foundation that aims to build a business on a community of rickshaw pullers by using their vehicles for outdoor advertising and selling products.
Jay Gupta, managing director, The Loot (India). Hemant Mishra / Mint
“I think a promoter needs to be better positioned to bargain with VC firms. His company needs to be at a stage where he can assert some negotiation power,” says Alam, founder-chairman of SammaaN. With leverage, funded through debt from the likes of Punjab National Bank and Dena Bank, SammaaN says it will look at raising Rs5-10 crore later this year from VC firms.
Alam was approached by a VC firm about two years ago after he won an entrepreneur hunt reality show. “The VC asked me to convert SammaaN into an outdoor advertisement firm, clearly overlooking that I wanted it to be a social enterprise with business viability,” he recalls, explaining his decision to approach banks.
For funding with immediate goals, say start-up managers, debt has several positives, top of which is that entrepreneurs do not need to part with equity. “For me, when it comes to raising capital, banks come first. I feel banks are...more reliable, particularly if a market crunch takes place. And secondly, they give you the freedom to run your own company,” says Jay Gupta, managing director at The Loot (India) Pvt. Ltd. The Loot, which has built up a chain of 85 discount apparel and accessories stores in four years, has raised Rs25 crore from the State Bank of India in 18 months.
Gupta says that for VC firms, giving out capital is more of a valuation game, which means that they would push for a speedy expansion and scaling up to grab a quick exit. For banks, it is normal business that they do not set the pace for a promoter.
Investment bankers predict start-ups will increasingly look at debt as not many investors are active and loans appear cheaper than equity. “We have seen an increase of 15-20% in the number of people approaching us for debt in this segment,” says Anil Birla, director, Sumedha Fiscal Services Ltd, a financial services provider.
If a firm has been in business for a few years, the balance sheet for three years is sound, growth of current and projected income is strong, management experience deep, and in most cases, the relationship with the lender has been without hassles, banks extend collateral-free loans of as much as Rs75 lakh with interest rates of 10-15%.
Most start-ups and small and medium enterprises plan to raise debt to tide over only the next six months and go for VC funding later. Chennai’s Enabling Innovations and Technologies Pvt. Ltd, which provides real-time asset visibility with its software, was earlier planning to raise $500,000 (Rs2.45 crore) from investors. Now, it has plumped for two phases: Rs25-40 lakh through short-term debt to finance operations of 12 months.
“We are ready to give collateral and the funding can come from either a financial institution or an industrial body,” says chief executive Uday Shankar. His firm will raise VC funds later.
Still, entrepreneurs, investment bankers and bankers recommend a mix of debt and equity. “In growth phase, when you leverage your business from one to five, you will have to look at equity,” says T.R. Srinivas, director, Ozone Capital Advisors Pvt. Ltd.
To be sure, there are promoters who still favour VC firms. “We would go for VC funding as we plan to go fast on expansion, considering the huge scope in retail,” says C. Gopalakrishnan, founder, Nstores Food Retail Pvt. Ltd, a firm that runs four stores and supplies bakery products and staples to 80 supermarkets.
The deal, he expects, will be announced in April.
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First Published: Tue, Feb 03 2009. 01 15 AM IST
More Topics: Venture Capital | NEN | Bank Loan | Money | India |