Sep292020
Posted by:admin
Working with Clean Energy Companies: The Caspian experience
This blog was originally written for the CLEAN network newsletter.
Caspian Debt has been providing customized collateral-free debt to Indian SMEs providing innovative solutions in highly impactful sectors since 2014. Our investee companies work in multiple sectors: agriculture, cleantech, education, financial inclusion, and health. Our clean energy companies work across a wide variety of technologies and business models. They work in solar but they also work in biomass and waste-to-energy. They work both in the rural and urban markets. Some sell appliances and products and some are involved in project implementation.
Caspian meets the needs of these innovative companies by coming in early, acting fast, and being flexible. This helps us provide debt to companies when they need it most.
Caspian debt helps companies when they are growing fast
Take the case of Cygni Energy which manufactures highly efficient solar home systems. As the push for rural electrification progressed, government orders were pouring in. The company first availed of a revolving line of credit. In a revolving line of credit, a maximum borrowing limit is fixed based on expected future orders. When a company actually gets an order, it can avail of the limit and payback when it receives payments from its customers. More orders came in suddenly. Cygni took a short-term loan to meet the working capital needs to fulfill these orders. With time, as they got more confident that they had a steady revenue stream, it converted its revolving line of credit to a term loan that could be repaid over three years.
Caspian can help companies in these types of situations because we can increase limits or follow up with another loan even before the first one has been fully repaid. We can also be flexible on the need for security for the loans. This is particularly important for entrepreneurs who do not have the family wealth to mortgage lands and buildings for getting bank loans. The Indian banks provide collateral-free loans under the CGTMSE scheme but are often unwilling to go any further than the specified limit. Argo Solar, which provides solar rooftop solutions took a term loan of INR 1 crore under this scheme. The promoters did not have to mortgage the personal apartments they lived in but the company’s assets were all mortgaged to the bank. When Argo Solar started growing and needed additional working capital, the bank which had supported the company in its infancy was unwilling to lend further. Caspian stepped in. It was not easy. Initially, the bank refused to even share “pari-passu” charge on the company’s assets by which the new loan of Caspian would have an equal footing with the loan provided by the bank. Caspian actively advised the young founders on how to make the case to the bank that this additional loan would only strengthen the company.
Caspian debt helps companies when they hit a roadblock
External shocks (such as this pandemic) create situations of a liquidity crisis. Companies often need a loan to ensure that they do not become insolvent just because they are temporarily illiquid. Greenway sells cookstoves to rural households using Micro Finance Institutions (MFIs) as channel partners. In 2016, with demonetization, the MFI could not collect money from its rural customers. Greenway was suddenly faced with increasing debtors and shrinking sales. Caspian offered a bill discounting facility to help tide over this liquidity crisis. Greenway discounted the receivables from the MFI partners and was able to pay its own suppliers and employees. The MFI partners got more time to make payments. With time, business came back to normal.
Pivots are common as companies innovate. Companies often have to shift quickly from one product-market to another. Punjab Renewable Energy Systems Private Limited (PRESPL) was supplying biomass waste as fuel for power generation companies had raised equity capital based on its initial traction. It soon realized that it had to shift its target market. The power generation companies who sold to the state-owned distribution utilities were themselves in difficult financial circumstances. PRESPL decided to target large Indian customers where the biomass waste could replace furnace oil used in boilers. The period of transition was painful as the one segment was shrinking and the other was not yet ready. Sales fell by 50%. Caspian after discussions with the company management offered a revolving line of credit. Within less than a year as the new segment started stabilizing the revolving line was converted to a term loan. The company doubled its revenue two years in a row.
Caspian debt helps companies when they are raising equity
Flexible debt allows companies to meet their working capital, grow fast, and attract private equity and venture capital at attractive valuations. Debt also provides a liquidity cushion for entrepreneurs to negotiate terms. Atomberg Technologies, which manufactures highly efficient fans, had signed a term sheet with a prospective equity investor. However, the deal broke down on the details. The business was growing fast but the company was losing money because it was investing in product development. There was a moment when the founders worried that they would run out of cash. Caspian, which had already provided two loans within two years, offered another loan. It allowed the founders to keep the momentum of sales going. the option of paying back whenever they raised equity money
Caspian helps its companies to move on
As a relatively small Non-Banking Finance company supporting some of India’s brightest entrepreneurs, we are aware of both our responsibilities and limitations. Our size allows us to be nimble to provide growth capital to SMEs and start-ups as they are growing fast or changing paths. But we also recognize that companies need to diversify their sources of funding. We actively maintain a large network of investors across commercial banks, venture capital, and venture debt. Many of our companies have brought in the next debt investor through our active intervention. Often the best moment in our relationship with a company is when they do not need us.
