Running a business means having many challenges and opportunities that require owners to have cash on hand. These can be anything from bidding for contracts, purchasing much-needed equipment or investing in new technologies. This is fine if the need is long-term and you can save up for it; however, if you need capital tomorrow for something, you need to be looking at a financing solution called a cash advance.
Importance of Access to Quick Financing for SMEs
Access to quick financing solutions is a significant driver of SME growth. Without adequate funding, many promising businesses remain stagnant, unable to scale, innovate, or contribute meaningfully to the economy. By addressing financial access barriers and expanding alternative funding opportunities, South Africa can unlock the full potential of SMEs and drive inclusive economic growth.
For small to medium-sized enterprises (SMEs) that are looking to expand their product line or just improve cash flow, a cash advance is the ideal financing solution. In this article, we look at what this instrument is, why it’s ideal for SMEs and the different funders offering it.
What is a Cash Advance?
Known as a merchant cash advance, it is a financing solution that is specifically designed for businesses that use either a POS device, e-commerce platforms, or both, to receive funding based on their monthly transactions. In simple terms, it’s a type of business funding in which the funder is paid by taking a percentage of the business’s revenues or sale proceeds. This means you only pay back when you make money.
How Does Merchant Cash Advance Work?
There are two main features of a merchant cash advance. These are:
- It depends on how much revenue you make through your EFT transactions or point-of-sale (POS) system/payment gateway
- How much you repay, and how fast you repay it, is directly linked to how much revenue you make
What to Consider When Applying for a Cash Advance
There are three elements you need to consider when applying for a merchant cash advance:
1. Factor Rate
The factor rate is the cost or interest rate that you are charged for using a merchant cash advance. For example, if a factor rate of 1,25 is applied to a R100 000 merchant cash advance, the total cost of finance will be R25 000.
That’s R100 000 x 1,25 = R125 000. This means that the total amount to be repaid is the principal amount (R100 000) multiplied by the factor rate.
Lenders calculate based on how risky they deem the loan to be. The more risk, the higher the factor rate.
2. Repayment Amounts
Repayment of the total loan amount typically happens on a proportional-to-revenue basis. This means that the more revenue the business makes, the more it repays and vice versa. The percentage of the revenue to be paid back is decided by the lender and the applicant, based on affordability and how much margin there is on the products.
3. Repayment Terms
Because repayment is linked to revenue generated, there is no fixed repayment period for these loans. The faster the revenue grows, the quicker the repayment period of the loan.
Advantages and Disadvantages
Here are the advantages and disadvantages of a merchant cash advance.
Advantages
- Speed: Merchant cash advance loans are date-backed, and the date is normally readily available. Because of this, loan decisions are made fast, and funds can be dispersed within hours.
- No collateral: These loans require no collateral, making them an ideal option for SMEs that do not own fixed assets.
- Flexible repayments: The revenue-proportional model in cash advance loans means that the repayment structure is flexible, reducing implications for SMEs who experience slow revenue months.
Disadvantages
- Can be expensive: Much like other unsecured loans, merchant cash advances can be more expensive than loans backed by assets. This is because of the increased risk that the lender is undertaking.
- Short-term solution: Cash advances are not designed for long-term use but rather for short-term growth. Also, the cash advance can be used for dips in cash flow, unexpected bills or payment of a contractor.
Application Requirements for Merchant Cash Advance
Although application requirements can vary from lender to lender, here are some of the common requirements for a merchant cash advance.
Qualifying Criteria
- Your business must have been operating for more than 12 months
- At least one director in the business must be a South African citizen
- You must accept credit/debit card payments for at least three to six months
- Generally, minimum turnover must be roughly R30 000 to R80 000, depending on the lender
Required Documentation
- Three to six months of up-to-date bank statements
- Three to six months of merchant service statements
- Proof of identity (ID)
- Business registration documents
Remember, because merchant cash advances are unsecured loans, you can get them even if your credit score is not good. The advances are granted based on business performance and card turnover.
Where to Apply for a Merchant Cash Advance
Many lenders offer a merchant cash advance. Most of these lenders require online applications, and turnaround time can be as quick as four hours. Lenders include:
- Nedbank Business: Nedbank has a merchant cash advance option under its business banking division
- GoTyme for Business: GoTyme (formerly TymeBank) offers a merchant cash advance with the promise of a quick turnaround within minutes
- Swoop Funding: Swoop Funding offers merchant cash advances. Applicants only need to join the platform to access the unsecured loan
- Yoco Capital: Yoco Capital offers a cash advance to eligible Yoco customers
- Payfast: Payfast, in partnership with GoTyme, offers a cash advance for customers pre-approved by Payfast
SMEs looking for a financing option that is short-term and can help cover unexpected costs, a merchant cash advance is the ideal choice. Before applying, remember that, as beneficial as the merchant cash advance is, there are drawbacks. SMEs need to ensure they are able to keep up with repayments and that revenue is high enough to ensure the repayment period is not longer than needed.
Running a business means having many challenges and opportunities that require owners to have cash on hand. These can be anything from bidding for contracts,… Read More
