The definitive guide to revenue-based financing for D2C eCommerce brands

Updated: Mar 25

Within eCommerce, D2C eCommerce brands are seeing an incredible rise as they tap into customer wants and needs and deliver high-quality, niche products. In India alone, the D2C market stands at $45 billion in valuation and is expected to grow to $100 billion by 2025 with a CAGR of 25%.

This rise is aided by the growth of eCommerce penetration, an increase in internet users, and the inadvertent push towards online shopping driven by the pandemic. Brands like Mamaearth and Licious have been able to establish themselves and compete against traditional players in very niche markets, and several D2C eCommerce brands are making a space for themselves in popular categories such as fashion, FMCG, and consumer electronics.

However, many smaller and mid-sized brands in this segment face stagnation issues and cannot realize their growth potential.

These issues usually relate to the working capital gap with insufficient marketing and advertising spends, hiring spends, and the inability to increase production despite persistent demand. Revenue generated by the D2C eCommerce brands may go into sustaining operations, thus limiting the potential to scale. The gap in current lending practices Access to growth capital can solve the above issues to a large extent. But traditional sources of financing such as banks loans and the venture capital route are difficult to materialize for eCommerce brands for the following reasons:

  • Banks demand collateral documents, personal guarantees, and multiple years of profitability statements. Early-stage D2C eCommerce brands may not have access to these financial statements.

  • Further, they need time to acquire a customer base and generate consistent revenues. While forecasting and projections can be done, banks typically do not depend too heavily on these forecasts, and the collateral asked for may be beyond their means.

  • This is where venture capital comes in. But VCs typically hedge their bets on lower-risk, high-return business models. In general, they expect 10-20x returns on their investments. According to Inc42 Plus data, only 8.9% of the funds raised through angel investors and venture capitalists belong to the D2C segment.

It is in this context, Revenue-based Financing (RBF) is becoming the new alternative as well as a complementary way of financing, compared to traditional debt and equity-based financing models. RBF helps finance repeatable working cycles of D2C eCommerce brands such that these brands can invest sustainably in their inventory and marketing spends. What is revenue-based financing?

  • RBF is a financing model where the loan is granted to a business for growth-related expenses and repayment is made as a percentage (5 to 20%) of revenues made thereafter. It makes use of data related to online cash flows as the reference point for the underwriting of the loans sanctioned. Usually, a fixed fee in the range of 4% to 8% is charged. Repayment is made monthly till the loan amount is repaid. Usually, the term period can be around 6 months but there is flexibility to account for lean months and fluctuating revenues. The loan amount can be as low as 5 lakh to an upper limit of a few crores, varying depending on the RBF firm.

  • For example, an eCommerce brand X enrolls with an RBF firm for a growth capital of INR 40 lakh at a fixed fee of 5% and a revenue share of 10%. This would make the total repayment amount to be INR 42 lakh. If X made INR 60 lakh in revenues on the month subsequent (say month 1) to the funding, the repayment would be INR 6 lakh for that month. In month 2, the revenues increased to 70 INR, proportionally, the repayment would be INR 7 lakh. In month 3, due to some unexpected events, the revenue dropped to INR 10 lakh, the repayment would also drop to INR 1 lakh.

  • This would continue until the total amount of INR 42 lakh is repaid. Multiple rounds of funding can be sought once the first cycle of loan repayment is completed. The terms and quantum of loans also improve based on the repayment history. Further, once the business is stabilized and is set on its growth trajectory, it can avail additional funds through venture capital and bank loans. This way, RBF acts as a complementary source of financing to the traditional means of debt and equity financing.

  • This model of finance is fairly new in India. Players such as Klub, are operating as financiers and have collectively financed several hundred startups and D2C eCommerce brands. These new-age RBF startups are also raising significant capital from VC firms such as Sequoia Capital.

How is revenue-based financing better? Several benefits make RBF ideal for D2C eCommerce brands, such as:

  • No dilution of equity: RBF does not require selling any stake in equity, and as a result, does not require relinquishing business controls unlike venture capital where founders would lose significant equity and thereby control of the business.

  • No collateral requirement: Unlike banks, which demand collateral and personal guarantees for financing, RBF requires no collateral in any form from the founders.

  • Ease of Access: The application form requires minimal data and the process is completely digitized requiring no offline document submissions or visitations in contrast with complex legal documentation required for banks and VCs.

  • Quick processing: The underwriting is machine-driven, based on data related to the marketing and revenue of the business. This enables quick processing and generation of the term sheets and easy disbursement usually between 7-15 days. In comparison, VCs may take 4 to 6 months and banks may take 1 to 2 months to process the funds.

  • Flexible payments: As payments are the percentage of revenue share, they automatically adjust to fluctuating revenues. In lean months, businesses would pay the percentage of revenue generated relieving the revenue stress on the business when compared to fixed repayments to bank loans in terms of EMI.

How can D2C eCommerce brands utilize these funds? Primarily, the growth capital secured by RBF is catered to meet recurring marketing and inventory spends.

  • Marketing and advertising spend: D2C eCommerce brands have extensive customer data that can be utilized properly with targeted ads and marketing campaigns on social media and other channels.

  • Inventory spends: The time for payment of inventories and realization of cash flows may differ by a few months. Inventory spends are also important for festive and sales seasons where high-volume sales are expected. Based on customer demand, new verticals can also be launched While marketing and inventory spend form the core of RBF fund utilization, the following categories can also be considered:

  1. CapEx: As a D2C eCommerce brand grows, it requires investment in capital expenditure to acquire property, machinery, and digital infrastructure upgrades including investing in tools and technology to support better customer experience and journey.

  2. Expansion to new markets: Analyzing traffic and sales of D2C eCommerce brands can highlight new geographies where the product line can be expanded to. RBF can help these brands settle down in new geographies without the looming threat of a loan.

  3. Hiring and talent acquisition: To scale the brand according to the business needs in terms of customer support, marketing, and so on, investments in hiring become important.

Making the choice

  • RBF has skin-in-the-game due to alignment in growth objectives between the lending company and the business entity involved. It democratizes access to capital and fosters data-driven business decision-making.

  • D2C eCommerce brands can benefit from this synergy and unblock hurdles to their growth and scalability in a sustainable manner, without having to dilute equity, or make changes to their brand story based on investor demands. We expect RBF as a lending method to gain immense traction in the coming years keeping with the growth expected in the eCommerce industry in general.

Upcoming D2C eCommerce brands can leverage Shoptimize’s partnership with Klub and others RBF startups to get quick access to growth capital. For further information, please reach out to us.