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If I can’t get a loan, would I qualify for a business cash advance instead?

It is often easier to get a business cash advance than it is a loan.

David Lewis

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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.

David Lewis, chief executive officer of Retail Capital, has over 22 years of credit risk management, with operational and executive level experience, gained in ICT, banking and consultancy in the UK and Africa. In his early roles, he was responsible for the implementation and management of ‘value-add’ solutions to enhance efficiency and effectiveness. Following this he joined Fair Isaac providing credit risk management consulting to key clients and ensuring optimal returns on client investment though data, analytics, best practices and aligning operational and technical processes. David and his management team established Retail Capital, a merchant cash advance provider.

Company Posts

How Spartan Has Geared Their Business To Help Fund Yours

Spartan doesn’t just fund entrepreneurial businesses, it is an entrepreneurial business. Kumaran Padayachee, CEO, Spartan reveals this is why his team understands SME financing needs and the unique challenges founder-led businesses face.

Spartan

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Historically speaking, entrepreneurs don’t typically have the quantity and quality of collateral needed to secure debt finance. It was this realisation that led Spartan to develop and deliver a solution that would help SMEs to grow their businesses, even though they didn’t always meet the criteria of more traditional lending institutions.

“We understand that many business owners don’t want to go the equity funding route, selling shares in their businesses in exchange for funding. Without the collateral needed to secure debt funding however, this is often the only route available to them,” says Spartan CEO, Kumaran Padayachee.

“We decided to approach things from a different angle. To service this sector, you need to be flexible. The same rules don’t apply as they do for corporates. To achieve this, we’ve assembled a team that really understands SMEs, their inner workings, the finance they need and the terms that will give them the best ROI for the funding they receive — after all, the point of funding is to help your business grow, so ultimately that’s what it needs to achieve.”

Spartan’s offers financing

kumaran-padayachee_spartan

At its core, Spartan finances small businesses (fast-growing companies with R5 million to R10 million annual turnovers) and medium businesses (R10 million to hundreds of million in annual turnover).

Related: Financing That Backs Entrepreneurs

Spartan finances specialised asset finance (tech, software, plant and machinery, office fit out and furniture); working capital finance (bridging finance, medium term loans); and growth finance (expansion, BEE deals, acquisitions).

Working capital in particular is a big portion of what Spartan assists its clients in. “This is project and growth-related finance, and many of the enquiries are for working capital, for which there is a huge need in the SME landscape.”

What finance suits your business?

As a debt funder, Spartan’s team carefully evaluates what the finance will be used for, and if the return is greater than the repayments — in other words, does finance make financial sense for the business?

“There are numerous ways that finance can be applied incorrectly by SMEs,” says Kumaran. “One of the first flags we look for is debtors age. If the industry norm is payment in 30 days, but a business is typically paid by its clients in 60 or 120 days, then we know there is something wrong with their internal processes.

Either the company is too shy to be assertive with clients, or it lacks the capacity or capability to invoice clients and collect cash. Either way, the result is a shortage of cash. Business owners in this situation apply for cash in order to be able to pay the bills, when they should be reviewing their business, pulling one or two levers, and improving their cash flows.”

Growing your business with alternative funding methods

On the other hand, there are many situations where working capital and bridging finance can help a business to grow beyond its own, organic abilities.

“A customer project or contract that requires a new product line or opening a new branch are both positive, expansionary situations. The problem is that there’s a lead time gap. You need to start the project, spend cash to hire people or purchase equipment, build internal capacity, deliver on the project and then the customer only pays you. Working capital and bridging finance allow the entrepreneur to do just that, and the company grows as a result.”

Related: Alternative Finance – Filling The Gap

Bridging finance in particular is high risk and requires a large amount of flexibility, which is why more traditional funding institutions shy away from it. Spartan on the other hand offers revolving bridging loans to customers the team has worked with. “We understand this space, and our aim is to support the entrepreneurs within it,” Kumaran concludes.

Alternative finance solutions

Spartan is an Alternative Finance company  that specialises in financing Small and Mid-sized businesses by providing: Growth Finance (structured finance for expansion); Specialised Asset Finance (equipment/machinery/technology/software/office fit-outs/energy/etc.) and Working Capital Finance (bridging finance & medium term loans).

Bridging Finance

Bridging Finance is available for one to three month terms and is ideal for contract or project-based businesses. It is a solution that assists businesses with solving cash flow issues due to growth-related challenges in their business and is either for a once-off need or for revolving business use.

www.spartan.co.za

Spartan is an Authorised Financial Services Provider 47631 and Registered Credit Provider NCRCP8669. e finance solutions.

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Funding

What do I need to do in order to get a successful crowd funding campaign?

Advice on getting the gold you need for your crowd funding campaign.

Ambassador Tal Edgars

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I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?

70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.

To get the best out of your campaign, I would strongly advise you do the following:

  1. Lay out your plan way in advance
  2. Keep a proper and well-articulated business plan
  3. Create a compelling story.
  4. Use the social media and start a social media campaign
  5. Frequently promote your fundraiser, connect and interact
  6. Dish out rewards and incentives
  7. To go viral, go for educative, informative and entertaining videos
  8. Be more than unique and creative as more exposure will translate to more potential pledges
  9. Choose the right crowd funding site for you.
  10. Know and understand your end target audience

 

 

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Funding

Where can I turn when banks are not helping?

Getting bank finance for my restaurant is almost impossible.

David Lewis

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Getting bank finance for my restaurant is almost impossible.  How else can I access the funding that I need?

Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.

Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.

The business cash advance

For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.

In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover.  For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.

The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across.  Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.

Quicker turn-around and more accessible

Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security.  It is also much faster, typically available within two weeks.

The advance amount is based on historical credit and debit card sales and pay overs are daily.   The costs are fully transparent and there are no penalties for late payments or extended payback.    However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.

As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.

Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.

What to use the advance for

The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc.  Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.

Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.

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