External Borrowing Window Opens Up Funding Options, Say Startup Founders

The Reserve Bank of India's decision to allow start-ups to raise external commercial borrowings upto $3 million in a year will open up more funding options for these companies.

Start-up founders and analysts said the external funding option will help those that may be struggling to raise capital in the domestic market. While most start-ups rely largely on equity capital, many seek small amounts of debt through venture debt firms and banks to supplement the equity funds. Large domestic banks, however, find it tough to lend to start-ups since many of these companies are loss-making. As such, allowing start-ups to raise debt funds from specialized lenders overseas can help ease the burden for these firms

“The Indian banking and financing sector does not have enough criteria based on which they can give funding for start-ups. In other countries the funding for start-ups is very liberal....Borrowing via ECB in Indian currency will save cost in terms of forex and help start-ups take advantage of lower interest rates as well,'' said Amarjeet Singh, partner at KPMG.

Start-up founders said liberalizing funding norms is timely given the slowdown in venture capital investments in India.

“Given the recent sentiment and some scepticism, RBI's decision to allow start-ups to raise external commercial borrowings (ECBs) is a very timely intervention. It will help ventures acquire necessary funds at a crucial stage in their life-cycle and in the long run, boost the health of the ecosystem,” said Ritesh Aggarwal, founder of OYO Rooms.

Hike Messenger's Kavin Bharti Mittal added that initiatives such as these are fantastic for early stage entreprenuers.

‘'We welcome any measure that eases fund raising, especially at an early seed stage, particularly for internet companies, where business models are not clear.”

The RBI's decision is in step with the government's attempt to provide support to the start-up community. In June, the government approved a Rs. 10,000 crore ‘Fund of Funds' for startups. The fund is expected to generate employment for 18 lakh persons, catalyze Rs 60,000 crore in equity investment and twice as much in debt investment, said a government statement at the time.

Opening up external funding options will be an added benefit for these venture, often perceived as high risk.

“ECB and other options open new avenues of investment and I am very happy that RBI has gone and looked at that space. Most of the large organisations have a lobby or a group which goes and talks. But the RBI intent for start-ups is a welcome step and I am happy about that'' said Vijay Shekhar Sharma, founder of Paytm.