Finding funds for a new business is tough even in the best of times. A new alternative could be the money-lending compromise BFIs and startups are looking for.
On the one hand, startups are in desperate need of better access to finance at the early stage, and on the other financial institutions too are searching for areas of investment that can yield the highest profits. While BFIs generally do not provide loans without any collateral, there is one tool which can be effective to both the banks and startups. Special Purpose Vehicle (SPV) can be one such alternative that comes in the form of a Limited Liability Company (LLC). “SPVs are specially established for growth financing purposes and the entrepreneurs do not need to show any collateral to get the loan from this entity," shares Abhaya Poudel, chartered accountant and founder of Biz Serve.
What is SPV and how does it work?
According to Poudel, SPVs are mostly formed to raise funds from the market. “Technically SPV is a company that has to follow the rules of formation of a firm as per the provisions of the Companies Act," he says. Nevertheless, he adds that it is just a terminology and such companies can be designed according to different economical contexts.
Poudel has been working to establish a SPV which will probably be the first of its kind in Nepal. "We have designed a debt financing model in our context which can be a good modality for operating a SPV," he says. In this customised design, any business entity, whether a financial institution or a corporate house, can open a SPV. Such companies take wholesale or bulk loans from commercial banks and lend a portion of the amount to startups that are looking for capital in their growth phase. Generally, the capital structure of SPVs is as follows: 80 percent investment from commercial banks and the remaining 20 percent from shareholders.
SPVs also thoroughly check the business modalities of startups, their strengths and loan returning capacity before investing. "The interest rates on loans might be a little higher than the commercial banks. But as the loans can be obtained without collateral, SPVs can be a good alternative for startups in the growth phase to get financing for their projects," Poudel says, adding, "Not only this, but the SPV also facilitates the companies with technical guidance and regular mentoring."
Financing through SPVs
The concept of micro financing is regarded as being similar to the SPV financing as micro-finance companies receive wholesale loans from banks for lending purposes. In micro financing, the borrowers form a group and in each group there is a person responsible to look after the lending process. "A similar kind of mechanism should be applied to the SPVs if they get approval from the Nepal Rastra Bank," Poudel says. According to him, if the Deposit and Guarantee Fund (DCGF) office, which is responsible for the deposits and credits of commercial banks, works for the SPVs, then SPVs will definitely be the perfect place for businesses to lend and borrow. Besides this, Poudel also views that close supervision and mentorship from the technical group of SPV to growing startups will also mitigate the associated risks.
There are two types of SPVs. One is the on-balance sheet SPV and the other being the off-balance sheet SPV. In the on-balance sheet SPV, the sponsor company's assets and liabilities are kept in the balance sheet whereas in the off-balance sheet types, assets and liabilities are kept as direct debt. "The kind of SPV that we have thought of is an on-balance sheet type which is a separate entity independent from the sponsoring company. The assets, liabilities will belong to the SPV itself and loans will also be payable," mentions Poudel. "Besides this, in the long term we are willing to list the company in the stock exchange."
Purpose of SPV
SPVs are usually designed for specific purposes to help in direct co-investment in one or more company. Such companies are being used for different purposes over the years including asset security, joint ventures and also to separate certain company assets or operations. SPVs have been created by trusts, corporations, limited partnerships and limited liability corporations. The use of SPVs began from Europe and US and has also benefitted quite a few renowned social media companies such as Pinterest and Twitter. They are also used to secure projects from possible finance or operational failures of companies. In that, they have a flexible structure, as they can be modified as per the need.
SPVs have only recently started working for the growth stage startup companies. In many economies including India and Malaysia, SPVs have been able to create equality in obtaining private funds.
Startup Policy 2017
A start in the right direction
The Startup Policy 2017 which is currently being drafted by the Ministry of Industry has mentioned SPV as being a ‘growth financer’. As mentioned in the draft, the startup growth financer will be regulated under the National Startup Development Council which will work as a special purpose vehicle (SPV) to provide debt financing to startups without collateral. “All banking funds that will be invested in startup companies as loans from banks will be provided through this mechanism,” reads the draft.