A new, and rather Welcome addition to the PE asset class in India is the rise of working capital financing. Alok Mittal wrote a nice, concise article explaining the benefits of this type of financing.
Invoice Financing is an extremely handy tool in the hands of B2B startups especially in India where payments, at least in certain verticals, are notoriously late. I have met many startups (where the product involves a hardware component) that are very leery of taking upon big orders – specifically because they are not confident of handling the working capital flow inherent in addressing a large incoming order. Indeed, many of them raise a round of financing just to be better-prepared to address a larger market with confidence.
I believe that this asset class with do well as long as the interest rates do not outweigh the benefits of getting financing. Remember, Equity financing typically does not involve any explicit cost – Preferred dividends/Buybacks are often paid out only in ‘adverse’ situations – but during the early years post-financing the proceeds are used to build the business. In success scenarios this equity merely changes hands — with just administrative expenses being the only explicit cost borne by the startup.