Savvy and new-age investors today are looking to tap alternative fixed-income type investment avenues in return for higher yields, portfolio diversification and lower market-linked volatility. On the other end of the spectrum, there is a constant stream of high-growth outfits, including start-ups, which are searching for capital without diluting their shareholding. This is where revenue-linked/based financing has emerged as a solution for both investors and capital-hungry companies. Some platforms such as Jiraaf, Betterinvest and KredX are bringing curated investment deals to investors in the invoice financing space. Here is a lowdown.

How it works?

Venture capital (VC) funding has grown massively in recent years. However, VC funding is not suitable and accessible for most companies.

This is where revenue-based financing (RBF) comes in. It is an alternative investment model to more conventional equity-based investments, such as venture capital and angel investing, as well as debt financing. In RBF, investors are entitled to regular repayments of their initially invested capital. Adding more convenience, a company is not required to dilute equity ownership. Investment deals available to retail investors in this space are through the invoice financing route.

Invoice discounting is the practice of using the company's unpaid invoices to raise working capital and fulfil its financial needs. Do note invoice discounting is different from invoice factoring where some outstanding invoices are outright sold to an external entity. Investors need to understand that invoice financing is a very niche product. So, the due diligence done by platforms before listing them will play a vital role.

Emergence of platforms

With the advent of specialised online platforms that aim to increase the supply of investors, opportunities are being designed and marketed to many investors at one go. Any citizen of India, above the age of 18 years with valid KYC documents, can invest. Typically, the minimum investment ticket size is ₹1 lakh, though it can be ₹3 lakh in some cases.

In simple terms, the platforms marry investment opportunities with investors. They charge fees for listing opportunities on their platform and this may be recovered from investor and/or borrower in the form of a spread while facilitating the transaction. Platforms claim they verify every invoice before listing.

By advertising the returns in the form of pre-tax IRR (internal rate of return) or flat returns per annum, such deals appear lucrative to yield-hungry investors. Thanks to the digital nature of investment platforms, alternative investments may seem simplified, affordable and transparent. But investors must do their due diligence before parting with their hard-earned money.

Investment opportunities

Let us take a look at some examples of live investment opportunities. Jiraaf offers an opportunity to invest in invoice discounting deal with a seven-year old logistics platform. The tenure is 91 days and the deal has a pre-tax IRR of 12.25 per cent. So, if you invest ₹1 lakh, you can expect to get about ₹1.03 lakh in three months. Jiraaf will monitor the investment throughout the life-cycle, provide regular updates to investors, and exercise rights on behalf of all investors in case of any event of default. Similar invoice discounting deals on Jiraaf had 30-60 days tenure, with 11-13 per cent pre-tax IRR. In the case of KredX, the minimum investment size for deals is ₹3 lakh. Tenures are similar at 30-90 days.

BetterInvest platform specialises in connecting investors with revenue-based financing opportunities in movies. Movie production houses receive payment from OTT platforms after 60-90 days post movie release. To bridge capital needs, movie houses sell their OTT invoices to investors/lenders and the OTT directly pays them. The marketed returns are 12-18 per cent annum and the tenures are one-six months. To boost confidence of general investors, you may be investing with an experienced co-investor with an advertised track record. Investors may get access to attractive perks such as movie merchandise, exclusive events, movie tickets and vouchers.

Due diligence
While alternative investments may seem simplified, affordable and transparent, investors must do their due diligence before parting with their hard-earned money
Risks involved

Any investment comes with its own associated risk.

While platforms pay investors the final amount after deducting tax, there seems to be some confusion on the total tax liability. Some platforms say investors will not be required to pay any more tax, but others are not that sure. Hence, the onus is on the investors.

Do note the risk in invoice financing, however low, could be total capital erosion in the worst-possible scenario. While platforms say they do due diligence and cap risks, any non-market linked investment is not as transparent as market-linked ones.

Most of the platforms are tech platforms and do not assume any credit risk on behalf of the investors. They will not be liable for any delays, defaults, frauds, misrepresentations etc. on the part of any counterparty(ies). The platforms are only a facilitator of opportunities and do not guarantee any repayment or scheduled payment under any scenario. This is in contrast to traditional fixed income avenues such as bank FDs that even have deposit insurance for deposits.

Any forward-looking information is based on past performance and certain assumptions which may be relevant during adverse market conditions. This is especially true for the liquidity and realisable value of opportunities, which may vary significantly with changes in market and economic conditions. While lending the money the borrower entity may have been healthy financially, but things can change in the next 30-180 days.

Although some opportunities may be backed by some collaterals, the realisable value of the assets may turn out to be lower.