The simplest way to compare business funding is the total you pay back in rand, and how long you have the money for. A factor rate, a fee per 30 days and an interest rate a year all look different on paper. Turn each one into rand before you decide.
Three ways the cost is shown
A factor rate. Used for a merchant cash advance (MCA). You multiply the advance by the factor. An advance of R100,000 at 1.25x means you pay back R125,000. The cost is fixed when you sign. It doesn't go up if you take longer to pay, and it doesn't come down if you pay faster.
A fee for a period. Used for invoice discounting. The funder charges a percentage for every 30 days, or every day, until your customer pays. The longer your customer takes, the more it costs.
Interest. Used for most loans, including working capital and asset finance. It is a percentage a year, worked out on the amount you still owe.
The examples below are illustrative. They are not quotes. A real offer depends on your business, its turnover and the funder.
Example 1: a cash advance, and a slow week
A business takes a cash advance of R200,000 at a factor of 1.25x.
- Total to pay back: R200,000 x 1.25 = R250,000
- Cost: R250,000 minus R200,000 = R50,000
The indicative factor range is about 1.18x to 1.35x. On the same R200,000, that is a total of R236,000 (cost R36,000) at 1.18x, up to R270,000 (cost R70,000) at 1.35x.
Repaid as a share of card takings. Say the funder takes 10% of card takings (a figure picked for this example only). In a normal week the business takes R100,000 on card, so R10,000 goes to the funder. At that pace the R250,000 is paid in 25 weeks.
Now add one slow week of R60,000 in card takings. That week the funder takes R6,000, not R10,000. After 25 weeks the business has paid 24 x R10,000 plus R6,000, which is R246,000. The last R4,000 comes off in week 26.
The slow week made the advance take about one week longer. The cost stayed R50,000. The South African SME Finance Association's Code of Conduct describes this card-split version as a purchase of future card receivables, not a loan, and says "There is no set period of payment of the purchase price."
Repaid as a fixed weekly amount. Take the same R250,000 collected over 26 weeks: R250,000 divided by 26 is R9,615.38 a week. In a normal week that is about 9.6% of R100,000 in takings. In the slow week it is about 16% of R60,000. The amount doesn't drop when sales drop, unless the funder agrees to change it. A fixed-repayment advance is set out differently by each funder, and the agreement states its legal structure. Read it before you accept.
One more thing about time. R50,000 is the cost whether you pay in six months or twelve. Paying it over six months means you had the money for a shorter time, so the cost per month of use is higher.
Example 2: invoice discounting, when the customer pays late
A business has issued an invoice for R100,000 to a customer on 30-day terms. A funder pays out against it now. For this example the fee is worked out on the full R100,000. i-Discounting's FAQ doesn't say whether its fee is on the invoice or the amount advanced, so ask your funder.
Some funders charge by the day, so you pay for the days the invoice is actually outstanding. Others charge per 30-day period.
At about 1.5% to 5% per 30 days (an indicative range): - Customer pays in 30 days: R1,500 to R5,000 - Customer pays in 60 days: two periods, so R3,000 to R10,000
At a daily fee of 0.11% to 0.15% (the range i-Discounting publishes): - 30 days: 30 x 0.11% = 3.3%, up to 30 x 0.15% = 4.5%. That is R3,300 to R4,500 - 60 days: 60 x 0.11% = 6.6%, up to 60 x 0.15% = 9%. That is R6,600 to R9,000
Whichever way it is priced, a customer who pays a month late roughly doubles the cost. Before you sign, ask what happens if the customer pays at 60 or 90 days.
Example 3: working capital, repaid in fixed instalments
A business borrows R300,000 for 12 months and repays the same amount each month. To work out the cost:
- Total repaid: 12 x the monthly instalment
- Cost: that total minus R300,000
Working capital cost is risk-based and set by the funder, so we don't publish one rate across all funders. Ask the funder for the monthly instalment and the total you will repay, then do this sum yourself. The funder confirms the cost after reviewing your application.
How to compare two offers
Ask each funder for three numbers in rand: what you get, what you pay back in total, and over how long. Then ask what happens if your sales drop, or your customer pays late.
Some business funding is covered by the National Credit Act (NCA), and some isn't. For a business, the NCA usually covers a company or close corporation (CC) only if both its annual turnover and its asset value (counting related companies) are under R1 million. Even then, it doesn't cover a loan or other credit transaction of R250,000 or more. Where the NCA does apply, the National Credit Regulator's advice is that a genuine credit provider "won't mind waiting if you want time to think and compare the costs of credit by using a quotation". Our page on NCA maximum interest rates explains the caps.
We don't charge you a broker fee. The funder may pay us a commission or referral fee on a funded deal.
Next step
If you want to see which kind of funding fits your business, check your fit.
Sources
- i-discounting.co.za: We charge a discounting fee of between 0.11% - 0.15% per day depending on who your debtor is
- sasfa.net: and https://sasfa.net/documents/SASFA%20-%20Code%20of%20Conduct%20final.pdf : "The MCA is a discounted sale and purchase agreement, and not a loan
- ncr.org.za: NCR media release, July 2018: "A genuine credit provider won't mind waiting if you want time to think and compare the costs of credit by using a quotation
- justice.gov.za: National Credit Act s4 and, s9
- gov.za: Notice 713 of 2006, thresholds R1 000 000.00 and R250 000.00