पाठशाला Pathshala · धन Dhan, Money · Lesson 27 · Scale

Revenue-based financing, invoice discounting and working-capital lines

Money that is repaid by the cash it finances costs no equity. Compare revenue-based financing, invoice discounting and bank lines on their real annual cost, their covenants and the cash cycle they fit.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

Boats and a cargo ship at anchor in the Arabian Sea off Mumbai. — Photograph: Phalansh Eeshev · Pexels

A company that sells for ₹1 crore a month and waits sixty days to be paid is lending ₹2 crore to its customers. Funding that gap with equity sells part of the company to finance a timing problem. There are cheaper ways, and each fits a different cash cycle.

This lesson covers the cash cycle that decides which money fits, revenue-based financing and what its fee really costs (with a figure), invoice discounting and TReDS, bank working-capital lines, and when each beats equity. It ends with a quarterly review.

The cash cycle decides which money fits

Start with three numbers from the books: days of inventory, days of receivables and days of payables. The cash conversion cycle is the first two less the third, and it is the number of days each rupee of revenue spends tied up before it comes back. A D2C brand that holds forty-five days of stock, is paid by marketplaces in fifteen and pays its manufacturer in thirty has a thirty-day cycle. A B2B software company billed annually in advance has a negative one. An enterprise services firm paid ninety days after invoice by a large buyer may have a cycle of a hundred days.

The cycle times the monthly cost of sales is the working capital the business needs, and it grows in step with revenue. That is the money non-dilutive capital is for: an asset that turns back into cash on a schedule. Losses, hiring ahead of revenue and product bets are not that asset, and money borrowed against them has to be repaid from somewhere else. [The payback lesson](/library/payback-period-and-cash-trap-of-fast-growth) shows how fast growth deepens the hole; this lesson is about filling it without selling shares.

Revenue-based financing: a fee, not a rate

A revenue-based financier advances a sum against a business’s recent revenue and takes back a fixed share of each month’s revenue until the advance and a flat fee are repaid. One Indian provider, Velocity, describes a fixed fee of five to eight per cent with no other interest component, gives the example of a six per cent fee on ₹40 lakh for ₹42.4 lakh repaid at ten per cent of revenue, lends from ₹10 lakh to ₹10 crore to digital businesses with at least ₹10 lakh of monthly revenue, and deploys the money through NBFC partners under a loan agreement, without collateral or personal guarantees. That structure is typical: the platform underwrites on live revenue data from payment gateways, marketplaces and the bank account, and the borrower signs with a regulated lender.

The appeal is speed and fit. Repayments fall when revenue falls, there is usually no equity or warrant, and the money can arrive in days. The catch is in the word fee. A flat fee says nothing about time, and the time over which it is paid decides what it costs.

What the fee really costs

Take that ₹40 lakh at a six per cent fee and ten per cent of revenue. A business selling ₹40 lakh a month repays in eleven months, and the fee works out to about thirteen per cent a year. The same business selling ₹80 lakh a month repays in six months, and the same fee costs about twenty-five per cent a year. Selling ₹20 lakh a month it takes twenty-two months, and the cost falls to under seven per cent. The fee rewards the lender most when the borrower does best.

Set the sliders to your own revenue and the terms on offer, then add the processing charge and the GST on the fee that the lender’s schedule shows, which the figure leaves out. Ask every lender for its annual percentage rate in writing. Since 1 October 2024 the RBI has required lenders to give borrowers of retail and MSME term loans a key facts statement showing the annual percentage rate with all charges included, and charges not in it cannot be levied without the borrower’s explicit consent; Vinod Kothari’s note on the April 2024 circular sets out the scope, which excludes working-capital lines. An honest lender will show you the number the figure computes.

Then read the rest of the agreement, because the rate is not the only price. Revenue-based lenders usually take control of collections, through an escrow account or a direction to the payment gateway or marketplace to pay them first, and they may set minimum monthly repayments that bind when revenue dips. Some ask for personal guarantees despite the marketing. Most forbid taking another advance without consent, and founders who stack two or three advances from different platforms find that a third of each month’s revenue is spoken for before payroll. Put every facility’s claim on revenue on one line in the cash plan and keep the total well below gross margin.

A flat fee is a rate in disguise. Divide it by the months it is outstanding before you compare it with anything else.

Invoice discounting and TReDS

Invoice discounting turns an unpaid invoice into cash now. A lender advances most of the invoice value and is repaid when the customer pays; the cost is a discount for the days outstanding, and it depends far more on the buyer’s credit than on the seller’s. That makes it the right instrument for a young company selling to large, slow, creditworthy customers: the risk being priced is the customer’s, not yours.

Trucks parked in a green field near Tenkasi with egrets in the grass. — Goods delivered and invoiced are still money the supplier is waiting for. Discounting the invoice lets it stop waiting. Photograph: Aravind P.S · Pexels

For a supplier registered as a micro, small or medium enterprise, the Trade Receivables Discounting System is the public version. TReDS platforms, introduced by the RBI in 2015, let MSMEs sell receivables from corporate buyers to banks and financiers that bid for them. A PTI report records that the MSME ministry’s notification of 7 November 2024 required every company with turnover above ₹250 crore to register on TReDS by 31 March 2025, down from ₹500 crore before. If your customers are that size, they should already be on a platform; ask them to accept your invoices there. [Section 43B(h)](/library/section-43b-h-paying-msme-vendors-on-time) gives them a tax reason to pay registered micro and small suppliers on time as well.

Bank working-capital lines: the cheapest money with the most paper

A cash credit or overdraft line lets the company draw up to a limit and pays interest only on what is drawn. Banks set the limit, called drawing power, from monthly statements of stock and receivables less a margin, and usually ask for audited financials, security over current assets and often collateral or guarantees. It is the cheapest working capital a company can get and the slowest to obtain, so apply before you need it, once there are two years of audited accounts to show.

Government guarantees make a first line easier. The Budget 2025–26 factsheet raised the credit guarantee cover for micro and small enterprises from ₹5 crore to ₹10 crore and doubled the cover for startups from ₹10 crore to ₹20 crore, with a one per cent fee for startup loans in 27 priority sectors. The guarantee protects the lender, but it is often what lets a bank lend without collateral. Ask whether your bank uses it. Checked on 11 October 2026.

When each beats equity

Use a bank line for the steady, predictable part of the cycle, because it is cheapest and grows with the business. Use invoice discounting or TReDS when receivables from strong buyers are the bottleneck. Use revenue-based financing to fund spend that pays back inside the repayment period, such as stock for a season or marketing with a known payback, when the bank line is not yet available. Use [venture debt](/library/venture-debt-in-india-when-it-makes-sense) to extend runway after an equity round. Use equity for everything that will not turn back into cash on a schedule: the team, the product, a new market.

The test is the same for all of them. Name the asset each rupee of debt will finance and the date that asset turns into cash. If you cannot name both, the money is equity in disguise and should be priced and raised as equity.

The working-capital review, every quarter

At each quarter’s close, recompute the cash conversion cycle and the working capital it implies at next quarter’s plan. List every facility with its limit, drawn amount, annual cost from the key facts statement, covenants and renewal date. Put any revenue-based advance into the figure at actual revenue to see its realised rate. Check which customers are on TReDS and which invoices could go there. Then match the gap to the cheapest instrument that fits it, and apply for the next bank limit six months before the [thirteen-week forecast](/library/thirteen-week-cash-forecast) says you will need it.

Nothing here is legal, tax or investment advice. The TReDS threshold, the key facts statement rules and the guarantee cover were checked on 11 October 2026; read every facility agreement with your lawyer before signing.