Debt financing: paving the way for D2C and SaaS businesses

Quick commerce is redefining what the ecommerce industry is capable of, optimising logistics, and reshaping customer expectations. It has also had a profound impact on the growing D2C sector. 

In India, the ascendance of D2C brands was due to the convergence of many factors: a rise in disposable income, increased access to the internet, a young audience with new buying habits, and better logistics. According to a KPMG report, Unravelling the D2C wave in India’s consumer commerce, the Indian D2C market, valued at approximately $12 billion in 2022, is projected to surpass $60 billion by 2027. 

D2C brands with their unique offerings, high quality, and homegrown appeal are thriving in India and also creating a space for themselves in global markets. 

The SaaS market has also seen a growth spurt in India in the last few years. Although many view the beginning of SaaS in the late 1960s, with the founding of Tata Consultancy Services, it was AdventNet (now Zoho) that began offering SaaS solutions in 1996. Today, Zoho is regarded as an Indian SaaS pioneer, followed in succession by Uniphore and Freshworks (originally Freshdesk). The growth of SaaS, in recent years, has been credited to the rise of new-age, digital-first consumers, with media reports estimating that the sector will surpass the $70 billion mark by 2030.  

However, the rise of D2C and SaaS brands begs the question: how can these small to midsize businesses obtain the financing to reach their full potential? Limited access to significant bank credit, little to no collateral and inadequate financial expertise stand in the way of accessing the right kind of working capital for their requirements. While manufacturing companies have land or factories to provide collateral, SaaS companies without physical assets find it difficult to borrow from traditional banks.

Upcoming D2C and SaaS brands have been proving themselves with their creativity, grit and business acumen. All that stands in their way is access to the right financing to meet their needs and help them grow.

The challenges with starting and scaling

D2C businesses — whether starting or scaling — often focus on building a robust business plan and clear vision for the future. However, of equal importance is securing the capital to get the business off the ground and running, or for expansion. 

A number of high upfront costs are involved when establishing a D2C brand. Marketing and customer acquisition take the lead, followed closely by seasonal inventory management, proof of profitability, and scalability challenges. For new brands, without a substantial track record, it can be hard to secure the funds required to build digital ad campaigns, manage inventory to handle seasonal fluctuations or stand out in an already saturated market.  

The SaaS model comes with its own unique financing challenges. Unlike traditional businesses that depend on large invoices or variable payments, SaaS companies rely on a revenue stream of monthly subscriptions. SaaS funding is primarily focused on marketing and customer acquisition efforts, where carefully crafted digital advertising, dedicated sales teams and customer support retain older customers while acquiring new ones.

SaaS companies also pour capital into product development and testing, enhancing software features, creating better user experiences, and staying competitive in the marketplace. While the recurring revenue model that SaaS brands follow makes it easier for investors to project future earnings, companies must also demonstrate low customer churn, retain customers, steadily acquire new customers, stay compliant and secure, integrate seamlessly with existing systems and deal with low resources or a lack of expertise in the company. Any one of these factors can keep investors - and funding - at bay.

Is debt capital the answer? 

With debt financing, companies can raise capital which will be repaid, with interest, over a predetermined period of time. Debt funding is an attractive option for both D2C and SaaS businesses and is rising in popularity over the last few years. In sharp contrast to equity financing, debt enables founders to maintain ownership of their enterprise while borrowing funds. 

More companies today are turning towards flexible and fast financing to manage cash flows, inventory, and expansion plans. Debt financing offers a range of different options, each tailored to different kinds of business plans. Long-term loans help companies expand production facilities and enter new markets while repaying the loan through equal instalments of principal and interest over the loan tenor. Short-term loans assist companies with day-to-day operational costs, such as payroll and marketing. This option is a good fit for D2C startups, helping them with fluctuating sales cycles. For SaaS startups, debt is a popular option, helping these companies to scale their options while offering flexible terms based on revenue metrics. 

"With AI-driven underwriting and real-time data insights, we make capital a catalyst, not a constraint. Empowering Indian founders with an array of options in the Financial toolkit to scale sustainably without dilution, without delays," says Bhavik Vasa, Founder, GetVantage.

The road to debt funding

One of the leading players in this sector is InCred Finance, a new-age tech and analytics-driven non-banking financial company (NBFC). InCred, along with companies like Recur and Getvantage has helped startups from a range of industries and sectors on their growth journey by offering tailored debt funding solutions. 

Nishith Maheshwari, Head – Digital Business Loans, InCred Finance, says they have financed over Rs 1,000 crore of growth capital to early-stage companies in the D2C and SAAS space over the last 18-24 months. “Our deep insights built on alternate digital footprint of D2C and SAAS companies and revenue forecasting models based on current sales, ROAS, customer subscriptions, etc., help us provide disbursals to D2C brands within two days, so the founders can truly focus on growing their business,” he says.

He adds that with the growth of quick commerce, there is also a need for quick capital given the change in working capital cycles, just like the parallel shift that is happening on the supply chain side to reduce the time for store refills. “We are happy to be leading this change with our ability to provide disbursals for growth capital within two days.”

Over 1,000 new-age D2C and SaaS companies have been able to access working capital and inventory financing from InCred that keeps operations running smoothly and stock levels optimal without feeling the bite of a small budget. Additionally, businesses have been able to fund digital marketing, influencer partnerships, and performance campaigns to acquire new customers, enable omnichannel growth across online marketplaces, offline retail, and quick commerce; as well as prepare inventory for the demand of festive seasons with increased capital. 

Eklavya Gupta, Founder, Recur, says Recur leverages cutting-edge technology to provide “fast, flexible, hassle-free debt financing to SaaS and D2C companies using their predictable revenues and cashflows so they can grow without diluting equity and aims to give terms within 48 hours”. “Founders today are lucky to have these alternate options to grow their business sustainably,” he says.

Tech and SaaS businesses, on the other hand, can access tech and cloud cost financing to cover their infrastructure expenses, software development, and third-party tools. SaaS companies can get upfront capital for expansion from InCred based on their recurring revenues. Also, D2C companies can ensure they maximise their sales during festive or peak seasons by availing InCred’s debt financing option specifically focussed on providing for the additional working capital required during such periods.

As new D2C and Saas players enter the market, it's important that their products and passion are powered by secure funding options. Debt financing allows businesses to seize new opportunities in the market, expand their business, and cater to new customers.