It is a catch-22 situation: in the current tough economic climate, small business owners – particularly in the restaurant business – are under increasing financial pressure and their need for working capital is growing. At the same time, the credit crunch and the associated bank liquidity requirements mean that banks have become more conservative in their lending policies, with the reduction of overdraft limits and an increase in the loan decline rate.
So, where do small business owners turn when faced with challenges like timing and onerous security requirements of traditional lending institutions?
Business cash advance now in SA
The business cash advance funding product was established over a decade ago in the US, borne out of the tight credit market and US banks’ increasingly conservative lending policies. This alternative funding option was met with great enthusiasm by small business owners and grew rapidly. It was subsequently introduced in the UK and Australia, where it has been equally successful.
Recently, it was introduced into South Africa, but many business owners are not yet aware that this alternative funding option exists – or what it involves.
A business cash advance is a buy and sell agreement between a business cash advance provider and the business owner, allowing them to use future card turnover as a way of raising working capital today. Quite simply, the cash advance provider advances a lump sum of the business’ future sales – so the business effectively funds its own growth. It takes an agreed proportion of all future card transactions until the total value that has been purchased is reached.
The pioneer of the business cash advance in this country is Retail Capital, a business cash advance provider. CEO David Lewis believes that while the South African credit market is traditionally a conservative one, the timing is ideal for the introduction of the business cash advance to the country. ‘Small business owners are welcoming this flexible funding option as loan applications are increasingly being declined by banks,’ he states. ‘They often find that the loan application process at banks is considerably time-consuming and complex, and that security requirements are restrictive – which is not the case at Retail Capital.’
Beluga Restaurant in Cape Town is one of many restaurants that has benefitted from this funding option. Since its inception, Beluga has reinvented itself a number of times, winning numerous awards along the way.
‘The banks seem to be stuck in a recessionary, risk-adverse mind-set and do not appear to have the appetite to lend money to restaurants at the moment,’ states owner and chef, Oscar Kotze. ‘If you are lucky enough to get credit, then you are looking at a combination of high interest rates, significant bank charges and more surety than is healthy. Over and above this, at the times when turnover is at its lowest, the fixed bank repayments represent a large part of your available cash on hand. I believe that Retail Capital enters into a win-win partnership with business owners and shares in the ups and downs of our trading seasons. The fact that they do not require surety and that payments are linked to turnover makes it very convenient.’