Alternatives to a bank overdraft for SA small businesses

Plenty of South African business owners have had the same conversation with their bank: an overdraft is possible, but only with years of financials, a personal surety, and a limit well below what the business needs. When that happens, the alternative lenders offer several ways to smooth cashflow. Each has a different shape, and the shape matters more than the lender.

Why the bank overdraft is hard to get

For a small, recurring gap, an overdraft on the account you already have is usually the cheapest money going: it is priced off prime and you pay only for the days you use it. The catch is getting one. For a smaller SME the limit on offer is often too low, approval can take weeks, and the security asked for often includes a personal surety, which turns a business facility into a personal one.

Alternative 1: a revenue-based advance

Best for: steady day-to-day trade with consistent revenue and no big invoices to finance. On Frank’s panel: Merchant Capital and Bridgement.

Shape: a lump sum up front, repaid as a share of your takings or over a short fixed period. Quiet months mean smaller repayments on a share of takings. It costs more than bank debt, but it is available at sizes and speeds a bank rarely matches.

Alternative 2: invoice finance

Best for: B2B businesses on 30, 60 or 90-day payment terms that need to close the gap between invoicing and getting paid. On Frank’s panel: Geddes Capital (invoice factoring).

Shape: the lender advances most of the value of a confirmed invoice straight away and settles the rest, less its fee, when your customer pays. The cost grows with how long collection takes.

Alternative 3: a line of credit

Best for: businesses that want an overdraft-like facility sitting there, drawn only when needed. On Frank’s panel: Lula.

Shape: you are approved for a limit and pay only on what you have drawn. It behaves much like an overdraft, but it is usually approved faster and without years of financials.

Alternative 4: a short-term loan

Best for: a one-off planned expense (new equipment, a marketing push, an opportunistic stock buy) with a clear payback. On Frank’s panel: Pollen Finance (unsecured) and Geddes Capital (secured).

Shape: a lump sum repaid in fixed instalments. Usually cheaper per rand than a revenue-based advance if you can carry the fixed instalment, but less flexible than an overdraft-style facility.

The decision tree

• Do you invoice other businesses on payment terms? Start with invoice finance.
• Do you want a facility you dip into now and then? A line of credit.
• Do you have steady daily revenue and need a lump sum now? A revenue-based advance.
• Do you have a specific one-off cost and steady cashflow? A term loan.
• Do you need the cheapest money and can you wait several weeks? Try your bank first, then these alternatives if the bank says no.

What not to do

Don’t stack several products to solve one problem. Don’t take a revenue-based advance to cover an unpaid invoice; invoice finance is cheaper and better shaped for it. Don’t use invoice finance to cover a tax bill; that is a job for a bridging or term loan.

Match the shape to the problem.

Give Frank one set of answers, about a minute, and it shows which of these shapes fits your business and which lenders on the panel offer it: See your funding options.