By: Marilynn Leonard | Co-founder, FundingHub, a South African credit market place for SMEs.
Whether you have landed a great order and need funds to deliver on it, a customer is late in paying their invoice or you want to take advantage of a special offer on a new piece of equipment for your factory or stock for your store – all can have a massive impact on your cash flow.
Your bank is the obvious starting point for a business loan, but this is not always the answer. This is where alternative lenders come in. This market has come a long way in the last few years with many niche players and products on offer.
Instead of considering the good old overdraft as your only option for a business loan, consider all these products and the pros and cons of each:
1. Unsecured Loans
Quick to receive a pay-out if you qualify, but more expensive than secured loans. Typical minimum requirements from these lenders are R 1 million in annual turnover and one year trading history.
Documents required: 6 months bank statements
2. Secured Loans
This type of business loan has a longer approval time due to the documents which have to be checked prior to approval.
The security generally accepted is paid-up property (property backed loan) or invoices from blue-chip companies (invoice discounting/factoring/debtor finance).
Documents required: They may request any of the following: annual financials, management accounts, bank statements, debtors listing and title deeds.
3. Merchant Cash Advance
Quick to receive pay-out if you qualify. Typical minimum requirements from these lenders are one year’s trading history and annual turnover of R1 million.
This type of instrument is most suited to the retail environment as the lender takes into account your income from your POS/credit card machine. The amount advanced is calculated based on the average monthly turnover of your business.
Documents required: 6 months bank statements
4. Asset/Equipment Finance
Assets/equipment can be purchased outright for cash or alternatively financed. This finance offers different options to purchase or acquire the right to use the equipment and generally uses the equipment as collateral.
The different types of equipment finance differ mainly in how ownership is transferred. Sometimes the funder owns the equipment and you ‘rent’ or ‘lease’ it over a certain term. You may have the ability to own it near the end of the term of the agreement; it all depends on the contractual terms.
Documents required: Supplier quotes and possibly financials, forecasts and a business plan depending on the lender.
5. Purchase Order/Tender Finance
Purchase order funding has become a popular way to finance a company that has received a large purchase order from a customer. This is one step before the invoice is generated.
A purchase order loan bridges the gap between order and payment and has the advantage of being faster and easier to obtain than a traditional bank loan. A purchase order loan is based on the creditworthiness of your buyer (customer).
Documents required: a valid purchase order and a supplier quote.
6. Revolving Credit
This is similar to an overdraft or a credit card because as it has a limit assigned to it and the lender allows you to draw down against that limit when required.
One key difference from an overdraft is that this product is not linked to a bank account and can therefore be offered by a wide range of lenders, not just banks. Interest is also only paid on the funds drawn down. Revolving credit could be secured or unsecured.
Documents required: Varies as to whether it is secured or unsecured.
7. Trade/Stock Finance
Trade Finance finances international and domestic trade transactions. It is generally used to secure inventory (stock) or raw materials.
Documents required: Annual financial statements for the past three years, management accounts until present, aged debtors list, list of creditors, personal statements of assets and liability of all shareholders and a bank facility letter (if they have a facility with the bank this will state what the bank has taken as security).
