Merchant Capital

Bank Loans & Cash Advances: Not one-size-fits-all

When it comes to financing small business in South Africa it is not a one-size-fits-all scenario, in fact, it is quite the opposite: Facilitating growth, is all about options. Think about the clothing in your cupboard – on any given day, you will select different attire for varying uses and it is essential that you select the appropriate garment for the right occasion. The funding of a small business is no different. So ask yourself: “Where is my business going and what should it be wearing on the way?”

Is it a ‘shirt ‘n tie’ or an ‘open collar’ kind of day?
Some occasions will call for something more formal while others allow for some flexibility. With this in mind, let’s talk about traditional bank loans versus cash advance products: First understand that while both financing models involve receiving and repaying sums of money, merchant cash advances are not the same as bank loans. In the simplest terms a cash advance is not a loan at all. It is a ‘Buy and Sell’ agreement between a merchant and a provider. It’s more ‘open collar’ in that it is not governed by the same rules when it comes to qualification criteria, terms, collateral, pricing, flexibility and turnaround times. So the first thing you need to decide is how ‘formal’ you want this transaction to be.

Sweat shirt or blazer?
Next you need to understand varying terms and decide whether you prefer a more relaxed ‘sweater’ option or a structured ‘blazer’. A cash advance is like a sweatshirt that can relax when your business slows down but can also help you work off a sweat when things are moving faster. This is due to flexible terms, which allows repayments in-line with seasonal turnover. This can provide a more relaxed fit than say a snug bank loan ‘blazer’ which is a lot more formal utilizing fixed terms with set monthly repayments.

Zipper vs. button down
Putting up collateral in order to secure your loan is like getting into a button-down dress with fastenings all the way down the back: Hard to get into and quite the commitment. A cash advance product offers a simpler ‘zipper’ option, as it is a largely unsecured product with no collateral. That being said, all the company directors will still need to sign personal surety. In comparison, banks will offer a number of both unsecured and secured options – like clothing- some will fit easier than others.

Are you willing to pay a premium for designer products and fast delivery?
A cash advance provider offers a bespoke product, which purchases a portion of your future turnover for a set cost and with no collateral. However, like those pre-release designer sneakers delivered to your door, an unsecured cash advance product with quick access can often cost you that little bit more. A bank loan however, will provide funding at a pre-specified interest rate over a set term. This service is more ‘off-the-rack’ and affordable with an interest rate that can increase or decrease based on external factors.

Cotton or stretch?
Flexibility of use is a key differentiator between the two types of providers: A cash advance product is a more elastic option as it won’t prescribe what is done with the funds received. In contrast to this, banks provide a non-stretch ‘cotton’ approach often prescribing the uses of the loan as business owners apply specifically for one use.

Flip-flops or trainers?
There are some options that you can just slip on and walk off, while others require a more padded sole appropriate for longer distances. One of the reasons cash advances are so tempting is their ‘flip-flop’ turn-around times offering a fit ‘n flit option with limited paperwork and an easy application process. Turnaround times for a Merchant Capital Cash Advance is approximately 48 hours. Bank loans however take time to apply and secure, requiring a more comfortable walking shoe. This may well work for you, if you have the extra time required to go the distance.

Hat or sunglasses?
Before offering the requested capital, both funding providers need to understand what protection is in place. When it comes to qualification criteria, a cash advance looks at past behavior as a predictor of future turnover. Therefore the business conditions from the past 12 months need to be assessed including understanding history of ownership, and requiring access to credit/debit card activity. Banks, however, fund a number of different types of businesses at different life stages: So start-ups for example, would require business plans, while collateralized loans would need proof of asset ownership. Both hats and glasses offer protection, so it really comes down to options and fit.

A comfortable fit
A smart dresser, like a small business owner, is one that has many options in their wardrobe. There is no right or wrong when it comes to choosing between a cash advance and a bank loan, it is simply a matter of preference and understanding what suits your business’ circumstances given available time in relation to the existing need. Ultimately what determines the right funding route for a small business in South Africa lies in understanding your unique financing requirements in order to assess which one is a more comfortable fit for your type and taste.

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