With no substantial relief from the government even in the INR 20 Lakh Cr Covid-19 stimulus, several Indian startups are now looking at other options to extend runways and get working capital. As they sail through the Covid-19 pandemic, which has dwindled their revenues, many startups have had to lay off employees, while others have had to scrounge for funds from investors and lenders. But a select few have also embraced commercial credit cards customised for startup needs in these tough times.
Startup-centric credit cards offered by fintech and digital lending players such as EnKash, Karbon Cards, Razorpay and others have become a primary choice for many startups. Besides these, Bengaluru-based neobanking startup Open has tied up with global card payment network Visa to offer a similar credit card which is yet to be launched. But one can expect more such offerings in the near future given the higher adoption for credit card products by startups for working capital and expenses.
EnKash’s cofounder Naveen Bindal told Inc42 that it received 25% more applications for its startup-focused credit card product in April and expects a similar trend for the month of May. Similarly, Karbon Cards cofounder Pei-fu Hsieh also said that the company witnessed an increase in application numbers, and also said that existing customers have increased the usage of the startup-centric cards.
In India, it is quite complex for a startup or a small, micro or small business (SMB) to obtain a commercial credit card from banks. If startups want to apply then they will have to place a fixed deposit with the bank. The card limit is equivalent to the amount of the fixed deposit, which again restricts usage.
According to Karbon’s Hsieh, a bank-issued credit card is actually very similar to a debit card as the startup is actually using the money deposited in the bank. Moreover, banks also ask for a guarantor for the credit card before issuing one. This makes commercial credit cards offered by the banks unattractive as compared to the cards offered by the fintech startups. “We don’t ask for a fixed deposit or a guarantor before issuing a credit card to startups or MSMEs,” Hsieh added.
It’s, of course, not just about getting a card but also having to manage the spending for different departments and function heads. “We want to make banking trivially simple and accessible for our partner businesses so that while they focus on building new ideas, products and experiences, we take care of their concerns around financial processes,” said RazorPay’s cofounder and CEO Harshil Mathur in a previous interaction with Inc42.
Besides the fixed deposit and a guarantor, regulatory complications and complex document verification processes also demotivate startups from opting for commercial credit cards issued by banks. In comparison, cards offered by fintech startups are issued in a faster time and have fewer constraints.
Hsieh said that Karbon’s cards, for example, can be issued within 24 hours while the application process takes only 15 minutes. In the lockdown period, the digital process helped many startups get credit cards in less than 24 hours, Hsieh claimed.
While banks have an involved process for issuing credit cards, fintech players use tech to make the process faster. EnKash, for instance, looks at factors such as funding of the startup, the background of founders, the product or service being offered by the startup and the traction it has seen in the market. Hsieh added that the investors of the company also are a crucial factor before determining the credit limit of a startup-focused credit card product.
Most startups can get a credit limit of INR 2 Lakh, and this can go up to INR 50 Lakh depending on various factors. For repayments, Bindal said many startups have a longer receivable cycle and based on their request, EnKash offers a credit card with the appropriate credit cycle. However, Karbon Card doesn’t encourage a longer repayment period or rollover dues for the next month.
“The habit of rolling over increases the risks of default. It’s better if startups pay the fee within the time period. We don’t earn from startups and neither plan to do so. Our revenues come from merchants where our credit is used,” said Hsieh.
However, Karbon is an exception. Most startup-centric cards have a payment cycle of 30-45 days, which is often customisable and fits in with the receivables cycle for the startup. This helps startups to pay for their immediate needs without disturbing the company’s balance sheet frequently, or having to pay extra penalty charges for late payments.
“For short-term capital needs for 15-30 days, commercial credit cards have an advantage over other options. It’s quite similar to credit cards which consumers use on their rainy days while sometimes startups use it for convenience,” said Enkash’s Bindal.
“It is fantastic to see fintech startups working with established banks and financial companies to cater to the evolving needs of the customers. Young and agile startups infuse advanced technology and re-energised innovation in traditional institutions giving an overall boost to the financial ecosystem,” Anuj Kacker, COO and cofounder, MoneyTap told Inc42 last year.
As of now, three types of commercial credit cards are available to startups. These include corporate credit cards which are given to employees for their limited usage, purchase card which is issued to different departments for their use, and business card which is used by the company to secure larger credit.
Many startups use these cards for monthly payments for subscription services such as cloud computing, enterprise applications and other SaaS tools. Many of the more popular SaaS providers are based out of India and require a credit card on file for payments.
“Startup founders can use their credit cards when the startup is initial stages but when it grows to a stage where different teams need a credit card for their purchases then it becomes very difficult for founders to manage the purchases,” Bindal said.
Besides this convenience factor, startups offering commercial credit cards also provide their customers with discounts and rewards. Some of these include reward points or discounts for using digital services on platforms such as Zoho, Freshworks, Hubspot, among others, which reduces the monthly cost for startups to a large extent.
While credit cards and their allied benefits are helping startups navigate the impact of the pandemic, there are other options available to them as well such as VC funding or debt rounds. But this involves protracted negotiations with investors and the threat of down rounds or low valuation.
As startups are already running out of cash and struggling to meet expenses, debt funding or loans at higher interest rates are also not an option. In such a situation, startups are seeing credit cards in a positive light, as they are not only offering them with 30 or 45 days interest-free credit, but also some rewards and incentives. Bindal and others credited these reward programmes and the inherent savings as one of the key factors in convincing startups to opt for commercial credit cards in the last two months.