Revenue Based Financing for D2C Businesses

by Rahul Khanna Tech Blogger

New-age direct-to-consumer (D2C) brands quietly managed to chip away at their customer base while the pandemic made life harder for large consumer brands as they tried to solve supply chain issues through private funding for the business. D2C brands frequently manufacture, market, sell, and ship their products directly to consumers, keeping the D2C model efficient and lucrative. The total addressable D2C market in India is anticipated to reach an astounding $100 Bn by 2025, which is an astounding increase from the already astounding rate of growth.

However, the startling rise also masks roadblocks that D2C businesses have encountered. One of them is acknowledging that capital drives growth & business loans for startups in india are difficult to get even in a startup-friendly environment. For example, any startup’s less glitzy historical competitors find it simpler to obtain loans from banks, while the same lenders are typically reluctant to lend to these digital first firms without collateral, personal guarantees, comprehensive financial documents, and more. As a result, they choose the less desirable course of action, diluting valuable equity and accepting conditions that may not always be in the brand's best interest.

Therefore, banks are no longer a factor, and accepting private investment requires giving up some ownership. Fortunately, there is a better approach out there to secure funding for business start up. Revenue-based financing has become a powerful alternative funding strategy, especially for D2C players in their early stages. Over 200+ D2C brands prefer Revenue Based Financing in India provided by debt investors for business like Klub.

Why do direct-to-consumer brands favour revenue-based financing?

● Investor’s Skin-in-the-game

A decrease in the borrower's earnings automatically results in a decrease in the financier's fees since the financier bases his or her fees on the borrower's future profits. As a result, they have a stake in the development of the D2C brand, and the partnership is profitable for both parties.

● No equity dilution

This is possibly the main factor contributing to the rising popularity of RBF. Due to the likelihood that venture capitalists would reject bids for the little amounts of financing they need, it is difficult for startups to get equity investment. Additionally, money for bigger sums is typically exchanged for valuable shares. Instead of requesting stock or board positions, RBF investors enable the D2C brand to maintain complete control over its business.

● Long pitching process with VCs

Before a transaction is finalised, it may take months or even years to pitch to venture financiers. But because RBF is based on automated underwriting and doesn't need lengthy documentation or equity exits, money can be approved and distributed in as little as four weeks.

● Opens the door to more funding opportunities

Following the acquisition of RBF, the D2C brand can use the money to run and expand its business. The brand will be in a better position to ask banks and venture capitalists for larger amounts of funding once it has established itself.

Due to the numerous advantages it offers D2C brands, RBF funding is becoming more and more popular. It is readily available, adaptable, doesn't require any collateral, and, most importantly, won't cause founders' control over their brands to be lessened. The cherry on top for founders is that they can concentrate on growth rather than fundraising.