Bank Loans & Cash Advances: Not One-Size-Fits-All

When it comes to financing small businesses in South Africa, it’s important to recognize that one approach does not fit all scenarios. Facilitating growth is all about options. Just like choosing different outfits for various occasions, selecting the appropriate funding for your business depends on your specific needs. 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 situations require a more formal approach, while others allow for flexibility. Understanding the differences between traditional bank loans and cash advance products is crucial. Both involve receiving and repaying funds, but a merchant cash advance is not the same as a bank loan. In simple terms, a cash advance is a “Buy and Sell” agreement between a merchant and a provider. It’s more relaxed, as it is not bound by the same qualifications, terms, collateral, pricing, or turnaround times as bank loans. The first decision is how “formal” you want this transaction to be.

Sweatshirt or Blazer?
Next, consider the terms of the financing. Do you prefer a relaxed “sweater” option or a structured “blazer”? A cash advance acts like a sweatshirt that can adjust to your business's ups and downs, allowing repayments that align with seasonal turnover. This flexibility offers a more comfortable fit compared to a bank loan, which typically has fixed terms and set monthly repayments.

Zipper vs. Button Down
Putting up collateral to secure a bank loan can feel like getting into a button-down dress with difficult fastenings—a significant commitment. In contrast, a cash advance product offers a simpler “zipper” option, as it is largely unsecured and does not require collateral. However, personal surety from all company directors is still needed. Banks offer a mix of secured and unsecured options, and the fit can vary.

Are You Willing to Pay a Premium for Designer Products and Fast Delivery?
Cash advance providers offer tailored products that purchase a portion of your future turnover at a set cost without collateral. However, like pre-release designer sneakers, this unsecured cash advance can come at a higher cost. On the other hand, bank loans provide funding at a predetermined interest rate over a specified term, making it a more affordable, “off-the-rack” option.

Cotton or Stretch?
Flexibility of use is a key differentiator between the two types of funding. A cash advance is an elastic option that allows business owners to use the funds as needed. In contrast, banks often have a non-flexible “cotton” approach, prescribing how the loan should be used based on the specific application.

Flip-Flops or Trainers?
Some options are easy to slip on and go, while others require a more supportive fit for longer distances. Cash advances are appealing because of their quick turnaround times, with limited paperwork and a simple application process. For instance, Merchant Capital offers cash advances with a turnaround time of approximately 48 hours. Bank loans, however, require more time to apply and secure, necessitating a more comfortable, patient approach.

Hat or Sunglasses?
Before providing funding, both types of providers need to understand what protections are in place. A cash advance provider looks at past behavior as a predictor of future turnover, assessing the previous 12 months of business conditions, ownership history, and access to credit/debit card activity. Banks fund various businesses at different life stages, requiring business plans from startups or proof of asset ownership for collateralized loans. Both hats and sunglasses offer protection, so it ultimately comes down to options and fit.

A Comfortable Fit
A savvy business owner, like a smart dresser, has various options in their wardrobe. There is no definitive right or wrong choice between a cash advance and a bank loan; it depends on your preferences and what suits your business circumstances. Understanding your unique financing requirements will help you determine which option is a more comfortable fit for your needs. You can unlock the ideal loan solution for your business with Merchant Capital today.