What is a business cash advance and how is it different from a loan from the bank?
A business cash advance, or merchant cash advance, is an alternative funding product that was developed in the US in 1998 and is available to small businesses who accept credit and/or debit cards as a means of payment for goods or services. The product has also been successfully established in the UK, Europe, Hong Kong, Singapore, Australia and South Africa.
The product was developed to provide funding to small businesses who were either unable to get a loan from banks, or for whom the time taken to get a loan from a bank was too long.
Typical customers include restaurants, beauty salons, retail shops and garages and it is estimated that up to $1bn funding per annum is provided to small businesses in the US through cash advances.
Cash advance vs bank loan
A cash advance is different from a traditional bank loan in a number of ways including:
- It is structured as a buy-sell agreement. In simple terms, the advance provider will purchase an amount of a merchant’s future turnover, for an agreed upfront payment and their charges are the difference between these numbers. For example, they may purchase R100 000 of future turnover for an R80 000 advance. Typically, companies will provide an advance of 1 – 2 months of card turnover.
- There is no fixed repayment term. Both parties will agree a percentage of card turnover that will be paid over to the advance provider by the merchant. After each day of trading, the agreed percentage of card turnover will be paid over, until the full amount agreed has been paid. Typically this repayment period will be between 7 and 12 months, but the actual time taken will be based on the turnover of the business.
- It is typically more expensive than traditional bank loans, but is more accessible, the application process is quicker and repayment terms are more flexible. In addition, there are no requirements to provide security or surety for a business cash advance. Companies that offer this product are able to provide advances to qualifying merchants within a week or so of application, whilst a commercial bank loan may take up to 12 weeks.