How to Secure Working Capital Loans and Cash Advances in South Africa

In the challenging and often unpredictable business world, securing the correct type of financing is essential to ensuring stability, fostering growth, and overcoming temporary cash flow shortfalls. Whether you’re running a bustling retail store, a quaint café, a dynamic professional services firm, or any other type of enterprise, understanding the range of financing options available can significantly impact your business’s trajectory.

In South Africa, the financial landscape offers a variety of options tailored to meet the needs of businesses of all sizes and sectors. This comprehensive guide will explore the different avenues available for securing working capital loans, merchant capital, cash advances, and business loans; by following the structured “How To” format provided here, you will gain valuable insights into making informed financial decisions, ultimately leading to the growth and success of your business.

Understanding Working Capital Loans

What are Working Capital Loans?

Working capital loans are short-term financing options designed to help businesses manage their daily operations, including covering expenses such as payroll, rent, utilities, and inventory purchases. Unlike long-term loans meant for investments in assets or expansion, working capital loans are intended to maintain business operations during periods of fluctuating cash flow.

Importance of Working Capital Loans The primary purpose of a working capital loan is to ensure that a business has enough liquidity to meet its short-term liabilities. Insufficient working capital can lead to cash flow problems, which might hinder the ability to pay employees, suppliers, or rent on time, ultimately leading to operational disruptions.

Access to working capital finance allows businesses to continue operating smoothly during periods of low revenue or unexpected expenses, making it an invaluable tool for maintaining stability and promoting growth.

Types of Working Capital Loans

There are several types of working capital loans available to businesses in South Africa, each with its unique features and benefits:

1. Trade Credit: An agreement between businesses and suppliers in which goods or services are provided upfront, with payment deferred to a later date. It is an informal working capital solution that can help manage cash flow without taking on debt.
2. Term Loans: These are traditional loans provided by banks and financial institutions with a fixed repayment period and interest rate. Term loans can be used to cover working capital needs, but they require a good credit history and may involve stringent application processes.
3. Overdraft Facilities: An overdraft allows businesses to withdraw more money than is available in their account up to a pre-approved limit. This option provides flexibility and immediate access to funds, although interest rates on overdrafts can be higher than those on term loans.
4. Invoice Financing: Also known as factoring, this option allows businesses to borrow against their outstanding invoices. The lender provides a percentage of the invoice value upfront, with the balance paid once the invoice is settled. This is particularly useful for businesses with delayed payment cycles.
5. Merchant Cash Advances: Though not a traditional loan, a merchant cash advance provides a lump sum of cash in exchange for a percentage of future sales. This option is beneficial for businesses with regular credit card or EFT transactions.

How to Secure Working Capital Loans in South Africa

Securing a working capital loan involves a series of steps that ensure you are well-prepared to approach lenders and meet their requirements. Below is a detailed guide to help you through the process:

Assess Your Business’s Financial Needs: Before seeking a working capital loan or any other business financing options, it is crucial to understand your business’s financial situation and determine the exact amount of funding required. Consider the following:

• Cash Flow Analysis: Review your business’s cash flow to identify gaps where a working capital loan could provide the necessary support. Consider seasonal fluctuations, upcoming large expenses, and any potential revenue shortfalls.
• Purpose of the Loan: Clearly define the loan’s purpose, whether to cover payroll, purchase inventory, or bridge a temporary cash-flow gap. This will help you determine the loan amount needed and provide clarity to lenders.

Explore Available Financing Options and Business Loans in South Africa: In South Africa, businesses can access various financing options, including traditional bank loans, alternative lenders, and government-backed schemes. Explore the different types of working capital loans mentioned earlier to find the one that best suits your needs.

• Traditional Bank Loans: Approach your bank to inquire about term loans or overdraft facilities. These options typically require a strong credit history and collateral but offer lower interest rates.
• Alternative Lenders: Consider non-bank lenders that provide more flexible options, such as merchant cash advances or invoice financing. These lenders may have less stringent requirements and faster approval times.
• Government Schemes: Research government initiatives aimed at supporting SMEs in South Africa. These programs often provide favourable terms, including lower interest rates or extended repayment periods.

Prepare Essential Documentation: Lenders will require specific documentation to assess your business’s creditworthiness and ability to repay the loan. Prepare the following documents:

• Financial Statements: Ensure your income statements, balance sheets, and cash flow statements are current. Lenders will use these to evaluate your business’s financial health.
• Business Plan: A detailed business plan outlining your business model, market strategy, and growth projections can strengthen your loan application.
• Tax Returns: Provide copies of your business’s recent tax returns to demonstrate compliance and financial stability.
• Bank Statements: Lenders may request bank statements to review your cash flow history and assess your ability to manage debt.

Apply for the Small Business Loan: Once you have identified the right lender and gathered the necessary documentation, you can proceed with the loan application. During the application process:

• Be Transparent: Provide accurate information about your business’s financial situation. Transparency is critical to building trust with the lender.
• Negotiate Terms: Don’t hesitate to negotiate the loan terms, including the interest rate, repayment period, and any associated fees. Ensure the terms are favourable and manageable for your business.
• Understand the Approval Process: Different lenders have different approval processes. Some may provide instant approval, while others may take several weeks. Be aware of the timeline and plan accordingly.

Utilise the Funds Effectively: After securing the loan, it’s essential to use the funds strategically to achieve the intended goals. Here are a few best practices:

• Allocate Funds Wisely: Ensure that the loan is used for the purpose it was intended, whether that’s covering operational expenses, purchasing inventory, or managing cash flow.
• Monitor Cash Flow: Continuously monitor your cash flow to ensure that the loan has the desired impact and that you are on track to meet your financial obligations.
• Plan for Repayment: Create a repayment plan that fits within your cash flow projections. Timely repayment is crucial for maintaining a good relationship with the lender and avoiding penalties.

Merchant Cash Advances: A Flexible Financing Option

What is Merchant Cash Advances or Merchant Capital?

Merchant capital, often provided through merchant cash advances (MCAs), is a type of financing where businesses receive a lump sum of cash in exchange for a percentage of future credit card or EFT sales. This form of funding is particularly beneficial for companies with consistent sales but may lack the credit history or collateral required for traditional loans.

Advantages of Merchant Capital

• Fast Access to Funds: Merchant capital offers a quicker approval process than traditional loans, making it ideal for businesses that need immediate funding.
• Flexible Repayment Terms: Repayments are tied to the business’s sales, meaning they fluctuate based on performance. This flexibility can be a lifesaver during slower business periods.
• No Collateral Required: Unlike traditional loans, merchant cash advances are unsecured, meaning businesses do not need to use assets as collateral. This reduces the risk for the business owner.

Industries Ideal for Merchant Capital

Merchant capital is particularly suited for businesses with steady credit card or EFT transactions. The following types of companies are ideal candidates:

• Retail Stores: With regular daily transactions, retail stores can use MCAs to manage inventory, cover seasonal cash flow gaps, or fund expansions.
• Restaurants and Cafés: High-volume credit card sales make restaurants and cafés prime candidates for MCAs, which can be used for equipment upgrades or working capital.
• Healthcare Practices: Clinics, dental offices, and other healthcare providers can use MCAs to purchase medical supplies, upgrade technology, or expand services.
• Professional Services: Businesses offering professional services, such as IT consulting or plumbing, can benefit from additional working capital to sustain and grow their operations.
• E-commerce Businesses: Online stores with consistent credit card sales can use MCAs to manage inventory, enhance their website, or launch marketing initiatives.

Steps to Secure Merchant Capital

1. Evaluate Your Sales Volume: Ensure your business has a consistent and regular credit card or EFT sales volume. Lenders look for companies with stable revenue streams, which increases the likelihood of approval.
2. Prepare Financial Documentation: Similar to working capital loans, you must provide financial records to the lender. This includes sales history, bank statements, and other relevant documentation demonstrating your business’s financial health.
3. Select a Reputable Lender: Research and approach lenders specialising in merchant cash advances. Choosing a lender with transparent terms and a solid reputation is important.
4. Understand the Terms and Conditions: Be clear on the repayment terms, including the percentage of daily sales that will be deducted and any additional fees. Understanding these details will help you manage your cash flow effectively.
5. Utilise the Funds Strategically: Use the funds to address critical business needs, such as purchasing inventory, upgrading equipment, or managing cash flow during slow periods.

Case Study: Successful Use of Merchant Capital

To illustrate the benefits of merchant capital, let’s consider a hypothetical case study:

Jane owns a thriving café in Cape Town. With a growing customer base, she needed to upgrade her kitchen equipment to meet demand. However, she did not have the savings or credit history required for a traditional loan. Jane approached a merchant capital provider and secured a cash advance based on her café’s steady credit card sales. With the funds, she purchased the necessary equipment, which allowed her to serve more customers efficiently. The café’s increased revenue enabled her to repay the advance without straining her cash flow.

Exploring Cash Advance for Businesses

What are Cash Advance for Businesses?

Cash advances are short-term financing solutions where businesses receive a lump sum of money in exchange for a percentage of their future sales. This type of financing is particularly advantageous for businesses that might not qualify for traditional loans due to a lack of collateral, poor credit history, or the need for immediate funds.

How Cash Advances Work

Unlike traditional loans with fixed monthly payments, cash advances offer flexibility as repayments are directly tied to the business’s daily sales. This means that on slower days, the repayment amount is lower, reducing the financial strain on the business.

Benefits of Cash Advances

• Quick Approval Process: Cash advances typically have a faster approval process than traditional loans, often taking just a few days. This speed is crucial for businesses facing urgent cash.
• Minimal Documentation Required: One of the appealing aspects of cash advances is the minimal documentation required compared to traditional loans. Lenders typically focus on the business’s sales history rather than requiring extensive financial statements or collateral.
• Flexible Repayment Terms: Since repayments are a percentage of daily sales, the amount paid back each day varies with the business’s performance. This flexibility helps businesses manage cash flow more effectively, especially during periods of fluctuating revenue.

Potential Drawbacks of Cash Advances

While cash advances offer significant benefits, there are potential drawbacks to consider:

• Higher Costs: Cash advances generally come with higher fees and interest rates than traditional loans. The total repayment amount can be significantly more than the original advance, making it crucial for businesses to weigh the costs against the benefits.
• Impact on Cash Flow: Because repayments are tied to daily sales, businesses might experience tighter cash flow during slower periods. This could limit the available capital for other operational needs.

Common Reasons for Cash Advance Declines

Understanding the common reasons for declines in cash advance applications can help businesses improve their chances of approval:

1. Low Sales Volume: Businesses with insufficient credit card or EFT sales may not generate enough revenue to support cash advance repayments. Lenders typically look for a steady and sufficient volume of transactions.
2. Poor Credit History: While cash advances are less reliant on credit scores than traditional loans, extremely poor credit can still be a barrier. Businesses should work on maintaining good credit practices to improve their chances.
3. High Existing Debt: Excessive current liabilities can signal a higher risk of default. Lenders may be hesitant to extend additional credit to businesses already burdened with debt.
4. Short Business History: New businesses with less than 12 months of operational history may struggle to qualify due to the lack of a proven track record. Focus on establishing a solid operational history before applying.

Steps to Secure a Cash Advance

1. Assess the Need for a Cash Advance: Ensure that a cash advance is the best option for your business’s immediate needs before applying. Consider the costs, impact on cash flow, and how the advance will help achieve your goals.
2. Select the Right Lender: Not all lenders are created equal. Research and choose a reputable lender with transparent terms and a proven track record. It’s also essential to compare multiple-lender offers to ensure you get the best deal.
3. Prepare Your Application: Ensure that your financial records, including sales history and bank statements, are accurate and up to date. A strong application will increase your chances of approval.
4. Understand the Repayment Terms: Before accepting the cash advance, be clear on how repayments will be calculated and the total cost of the advance. Ensure that the repayment plan aligns with your cash flow projections.
5. Use the Funds Wisely: Once the cash advance is secured, allocate the funds towards revenue-generating activities or essential operational needs. This will help ensure that the advance contributes to the business’s growth and stability.

Traditional Business Loans vs. Alternative Financing: Which is Right for Your Business?

In South Africa, businesses have access to both traditional and alternative SME funding options, each with its own set of advantages and drawbacks. Understanding these options will help you decide which is best suited for your business’s needs.

Traditional Small Business Loans

Banks and financial institutions typically offer traditional business loans. These loans often have lower interest rates, longer repayment terms, and require collateral or a strong credit history. They are ideal for businesses with solid financials and a clear growth strategy.

Pros of Traditional Business Loans:

• Lower Interest Rates: Traditional loans usually offer lower interest rates compared to alternative financing options, making them more affordable in the long run.
• Longer Repayment Terms: These loans often come with extended repayment periods, allowing businesses to manage repayments over several years.
• Structured Payment Plans: Traditional loans come with fixed monthly payments, making planning and managing cash flow easier.

Cons of Traditional Business Loans:

• Stringent Requirements: Banks often have strict lending criteria, including the need for collateral, a strong credit score, and a detailed business plan.
• Lengthy Approval Process: Traditional loans’ application and approval process can be time-consuming, sometimes taking weeks or even months.
• Less Flexibility: Traditional loans may lack the flexibility offered by alternative financing options, such as variable repayment schedules based on sales performance.

Alternative Financing Options

Alternative financing, including merchant cash advances, invoice financing, and peer-to-peer lending, offers more flexibility and faster access to funds. These options are particularly beneficial for businesses that may not qualify for traditional loans due to a lack of collateral or a shorter operational history.

Pros of Alternative Financing:

• Faster Access to Funds: Alternative lenders often provide quicker approval and disbursement of funds, sometimes within days.
• Flexibility: Repayment terms for alternative financing options are often more flexible, with repayments tied to daily sales or cash flow.
• Fewer Requirements: Alternative lenders may have less stringent criteria, making these options accessible to a wider range of businesses.

Cons of Alternative Financing:

• Higher Costs: Interest rates and fees for alternative financing options are typically higher than those for traditional loans.
• Impact on Cash Flow: While flexible repayment terms can be beneficial in some cases, they can strain cash flow during slower business periods.

How to Choose Between Traditional and Alternative Financing

1. Evaluate Your Business’s Financial Health: Assess your business’s credit history, cash flow, and collateral availability. Businesses with strong financials might benefit more from traditional loans, while those with less predictable cash flow may find alternative financing more suitable.
2. Consider the Loan’s Purpose: The funds’ intended use can influence your choice. Traditional loans might be more appropriate for long-term investments, while alternative financing could be the better option for immediate cash flow needs.
3. Compare Costs and Terms: Carefully compare the interest rates, fees, and repayment terms offered by traditional and alternative lenders. Choose the option that best suits your financial capabilities and business goals.
4. Understand the Lender’s Requirements: Traditional small business loans often require more documentation and a longer approval process. If your business needs immediate access to funds, alternative financing might be the way to go.

Final Thoughts on Securing Working Capital Loans and Other Financing Options in South Africa

Navigating the financial landscape in South Africa requires a clear understanding of the various financing options available to your business. Whether you’re considering working capital loans, merchant capital, cash advances, or traditional business loans, each option has its own advantages and considerations.

Following the steps outlined in this guide, you can effectively assess your business’s needs, explore the best financing options, and make informed decisions supporting your business’s growth and stability. Remember, the key to successful financing lies in choosing the right type of loan for your specific circumstances, working with reputable lenders, and using the funds strategically to achieve your business goals.

Whether you opt for the stability of a traditional business loan or the flexibility of a merchant cash advance, securing the right funding can provide the necessary support to navigate the challenges of running a business in today’s competitive environment.

Possible Questions Potential Clients Have Before Applying for Working Capital at JTB Consulting

What are the Primary and Secondary Industries that our Partner Funds?

Primary Industries:

• Retail
• Restaurants
• Fast food outlets
• Retail stores
• Hardware stores
• Autobody businesses
• Fresh food stores

Secondary Industries:

• Online Stores/E-commerce Websites
• Technology (e.g., FinTech, MedTech, EduTech)
• Health and Beauty (e.g., Spas, Salons)
• Medical (e.g., Doctors with Medical Practices)
• Manufacturing
• Engineering

Working Capital advances range between 50-100% of a client’s monthly turnover.

What are the Interest Rates and Repayment Period?

• Interest Rates: Typically between 2% – 5% per month, depending on the client’s risk profile and the funder used.
• Repayment Period: Generally, 3 to 10 months.

Are there variable rates, or is it a fixed rate for everyone?

• The rates are variable and depend on the application’s scoring.
• Industry standards are currently at 2 to 4% per month.

Are there any hidden fees, such as origination fees, prepayment penalties, etc., that I should be aware of?

• There are no hidden fees.
• If a client wishes to settle their facility early, they may be penalised, though some funders offer up to a 50% discount on the remaining markup for early settlement.

Working Capital Loans Case Studies

1. An engineering company in Edenvale was approved for R500,000 to complete a purchase order worth R1 million.
2. A clothing retailer in Kempton Park applied for R500,000 for stock purchases and was approved for R300,000 due to previous rental payment issues.
3. An auto dealership in Hartebeespoort Dam applied for R2 million and was approved for R1 million but took only R500,000.
4. Piza e Vino applied for R4 million and was approved to do renovations as they were de-franchising.
5. Galitos in Polokwane applied for R100,000 to open an additional Galipod store and took R80,000 of the approved amount.
6. A Caltex Petrol Station applied for R5 million to do renovations and was approved for the full amount.

Document Upload Requirements

Do I need to upload documents, and if so, what kind?

Yes, the following documents are generally required:

• 6 to 12 months of bank statements
• Copies of Directors’ ID documents
• CK document (Company Registration)
• Two supplier statements
• Lease Agreement and the latest rental statement

Application Process

Is the application entirely online, or do I need to be available for phone or video calls, too?

• The application process is entirely online.
• However, should additional information be needed, it will be requested via email and potentially followed up with a phone call.

Approval Timeline

• Generally, the approval timeline is within 3-5 days.
• Depending on how quickly the client provides the necessary details, delays can occur if additional information or paperwork is required.

What happens during these 3-5 days—are there any evaluations, background checks, or verification processes that I should be aware of?

• Each funder conducts its due diligence during this period.
• This typically includes credit checks, references, and other standard evaluations within the usual scope of financial assessments.

Are there cases where applicants get approved even faster?

• Yes, in some cases, especially where urgency is critical, approvals can be completed within 8 hours.
• This expedited process depends on the client’s needs and the specific funder’s capabilities.

Eligibility Criteria

You stated that businesses must have been operational for over a year and generate more than R100,000 monthly revenue. Is that R100,000 in gross revenue, or are we talking net?

• The requirement is based on gross monthly revenue.

How strict are these requirements? For example, what if my revenue fluctuates and is only around R100,000 in some months?

• A minimum annual turnover of R1 million is generally required.
• Fluctuations in revenue could be a declining factor, but each case is evaluated individually.

Does that still qualify?

• Qualification would be assessed per-application basis, as each business is unique.

No Business Plan or Collateral Requirement

Why don’t you need a business plan, and why don’t you need security for the loan?

• A business plan is not required because this is a turnover-based lending product.
• The assessment is based on the client’s current business portfolio, with the risk tied to the existing business.
• The finance is unsecured and does not require collateral; however, company directors must sign personal surety upon acceptance of the offer.

How do you assess whether a business is a good fit without these usual requirements?

• The assessment is based on business trends, including bank statement analysis, credit scores, supplier relationships, and overall creditworthiness.

Are there other factors (e.g., credit score, past debt, etc.) that come into play instead?

• Yes, credit scores, past debt, and other financial factors are considered in the assessment.

Funding Amounts and Disbursement

What factors determine how much funding I would be eligible for?

• Eligibility is determined based on affordability and the specific funding requirement.

Is the funding disbursed in one lump sum, or can it be distributed over time?

• Funding is generally disbursed upfront as a lump sum.
• However, if the client does not require the full approved amount, they can choose to draw only what is needed.

What if I need more funding later—can I reapply, or is this a one-time deal?

• Clients are eligible for a readvance once they have utilised 50 to 80% of their current facility.

Usage Restrictions

• This funding line is completely unrestricted; funds can be used for any business purpose, including ongoing expenses like salaries or investments into growth areas such as marketing and inventory.

Are you ready to secure the financing your business needs? Contact us today to explore your options for working capital loans, merchant capital, and other business funding solutions tailored to your needs.