Cash is a commodity that is in increasingly short supply in today’s business world. Businesses, especially start-up or small and medium-sized enterprises often have to rely on their debtors to settle their debts timeously to maintain a positive cash flow.
Traditional forms of finance for these enterprises, such as bank/private loans and overdraft facilities, are often impossible to arrange to sustain the business in the long run.
These enterprises have been compelled to look at different and innovative ways of maintaining and improving their operating cash flow.
Therefore, cash-strapped, start-up and growing businesses require access to settlement period ‘bridging’ finance to enable them to grow their businesses, and to take advantage of beneficial market conditions.
One of these alternatives is debt factoring. Debt factoring is the assignment of debts for consideration. The debt is sold to the debt factor for a price that is less than the face value of the debt, referred to as a discount.
Within this context in the current market conditions, debtor or invoice financing facilities provide an extremely viable option in terms of accessing working capital.
Cash advances are granted against funding already secured (a company’s debtor book or, for the smaller business, a single invoice). Advances of up to 80% of its total value are granted, with the only security required being creditworthy debtors and a clear credit record.
The concerns associated with slow or non-paying debtors, which includes defaulting on credit and loan repayment terms, are thereby eliminated.
Debt factoring is therefore no longer viewed as an alternative finance of last resort.
Merchant Cash Advance
A more recent development, increasing in popularity since the recent credit crisis in 2008, is the merchant cash advance (MCA). The MCA is a lending product related to debt factoring that has been available for the last 15 years.
This form of finance is essentially the business equivalent of a payday loan.
In its most common form, a lump sum payment is made to a business in exchange for an agreed upon percentage of future credit and/or debit card receivables. A percentage of the client’s daily credit or debit card sales is retained, either directly from the processor that clears and settles the credit or debit card payment or via a debit order from the client’s bank account, until the obligation has been met.
The merchant cash advance service provider (MCASP) often forms a partnership with card-payment processors to enable them to collect payments directly from the client’s point of sales terminal. In common with standard debt factoring transactions, a discount, as well as a processing fee, is charged.
MCAs differ from debt factoring due to the fact that debt factoring involves existing debt (i.e. goods have already been sold by the merchant to the customers), while merchant advances are based on future credit and debit card sales, i.e. the merchant is yet to sell goods to the customers. With debt factoring, an existing debt is sold to the factor, while with MCAs the merchant sells its future receivables. At the time of sale of the future receivables, there is therefore no right to payment by any specified customer, for any specified product or price.
The risk of non-payment has also not shifted to the MCASP, as repayment is collected from funds actually transmitted to the merchant, from customers that pay for the goods or services delivered.
MCASPs endeavour to distinguish their product offering from traditional loans. MCASPs therefore are not bound by legislation that would affect loans, for example the limiting of interest rates.
How it Works
We partner with our customers, linking payments to business turnover so that they match the cash flow cycles of the business to ensure affordability.
Each advance is tailored to the specific needs of each business owner and all costs are fully transparent and are agreed up front.
Based on a customer business’s average card turnover, we calculate the advance that the business qualifies for. We agree the total amount to be repaid and calculate this as a fixed percentage of your daily card turnover.
The advance is paid into your bank account for you to use in any way. Each trading day, you pay-over the agreed percentage to us until the full amount is reached.
One of the biggest advantages of this type of funding solution is that there are no fixed monthly payments, which means you won’t have to be burdened with extra expenses if you’re having a slow month.
Since the repayment terms are based on a percentage of your future credit card sales, the amount that’s tendered is proportionate to the amount of your credit card sales every period. Let’s say the agreed upon percentage to be deducted from your credit card sales is set at 5%.
If one month you bring in €5000 in sales, you will pay €250. And if in the next month you have sales of €12000 you will pay €600.
This means you only pay for the amount of business you do in a particular month.
The Process
1. Application Submission
One of our business consultants will personally assist you with all the necessary requirements, from completing your application form to helping you compile and submit all the relevant documentation.
2. Process Application
Our team will then review your application and advise the amount that you could receive as a cash advance.
3. 5 Days or Less
Once the deal is approved the money will be transferred directly to your bank account.
4. Access to Funds
You can use the money in any way that benefits your business; we do not require any security or place any restrictions on the use of the funds.
Agreement with Customers
The first element of a debt factoring transaction is the sale of debt, i.e. a debt is sold by a customer to Capital Four Four. The sale is affected by a sales agreement. For a contract to be a sale agreement, the essential requirements are that the parties have agreed that the seller will make something available to the buyer in return for the payment price.
At Capital Four Four our MCAs are concluded on a recourse and personal surety basis. A personal guarantee against fraud is however additionally required in all of our agreements. This personal guarantee stipulates the performance of a number of covenants contained in the MCA agreement.
These covenants are:
• that the merchant will conduct its business consistent with past practice;
• the merchant will exclusively use an agreed upon card processor for the processing of all its credit and debit card transactions;
• the merchant will not to take any action to discourage the use of credit or debit cards or to permit any event to occur which could have an adverse effect on its use; and
• the merchant will not sell, dispose of, convey or otherwise transfer its business or assets without the express prior written consent of the Capital Four Four.