When Simone Fellows approached her bank for a loan to prop up her pub’s finances, she suffered the same fate as countless small business owners before her: the bank said no.
Fellows, 46 and who has run the Golden Lion pub in Keswick since 2011, needed to raise money to bridge a gap in her cashflow after two big-brand competitors opened nearby and a flood in the area kept punters at bay temporarily.
It took her six months to recover from the dent to her business caused by the flood, during which time takings plunged by 50 per cent.
Simone Fellows of The Golden Lion pub applied for a business cash advance after being denied a bank loan
That didn’t mean she didn’t still have staff to pay.
‘When you go into business, you always believe you’ll have the knack for it and that you can accomplish anything,’ she says.
‘But unfortunately, not everyone is on your side. We needed help but the bank was really negative and they told me flat out no – even though I’d been pumping a huge amount through our bank accounts every year.’
Instead of giving up though, Fellows applied for a business cash advance – a form of business finance the Bank of England has tipped will pose a real challenge to mainstream lenders’ hold on the small business lending market.
She has taken six advances totalling £65,820 from Worldpay Business Finance – a lender which has provided funding in excess of £50million to UK SMEs since launching back in 2015.
Fellows didn’t disclose how much the advance cost her, but said: ‘Without them I wouldn’t have been able to carry on. The best thing about it is that it comes with the beauty of only paying back as we earn.’
What is business cash advance?
Business cash advances – or BCAs – turn the conventional bank loan on its head.
With a BCA there is a one-off flat fee to pay which is agreed upfront, with no interest, penalties or other charges.
Every application is considered individually and the amount charged is dependent on business performance. A company with a good performance history could negotiate a lower upfront fee as they pose a small credit risk to lenders.
Repayments are automatic and calculated as a pre-agreed percentage of a company’s future credit or debit takings, so you only have to pay back the advance and fee when the sales come in.
Worldpay provides advances between £2,500 and £300,000, which are administered by Liberis, a partner firm that also makes cash advances.
It typically takes around 20 per cent of revenues to fund repayment and there is no fixed term to repay in full – the duration of the loan is linked to how much money your business is bringing in.
If you only need the cash for a short time, the provider might bump up the repayments to take, say, 30 per cent of your revenues over four months for example.
The model means that unlike traditional loans, business owners do not face penalties for failing to make a payment.
Other lenders that use customer data for business loans
Amazon offers small business loans through its Amazon Lending service.
Amazon keeps this privilege for the select few, and it is by invitation only.
What’s more, the cash can only be used to purchase more inventory to sell on the platform only.
The tech giants has made than $3billion in small business loans to more than 20,000 Amazon sellers in the US, United Kingdom and Japan.
There is also a handful of companies that offer loans and cash advances based on your real-time ebay sales.
Fleximise is one of these and it offers a choice between a cash advance and a conventional business loan.
It’s becoming an increasingly popular way to access finance for small businesses and Worldpay is not the only player in this field.
Paypal allows its customers to take out an advance of between £1,000 and £100,000 through its ‘Paypal Working Capital’ service.
Here, the fixed repayment percentage is selected by the merchant when they apply for an advance, and can be anything between 10 per cent and 30 per cent of future daily sales.
According to PayPal, the value of cash advances issued through the service in the UK is now over £625million – a 56 per cent uplift since June 2017.
Both World Pay and Paypal declined to disclose their respective upfront cost charging parameters, but say they evaluate each customer’s risk and price them on that basis.
The qualifying criteria for BCAs is typically more relaxed than traditional bank loans.
The exact requirements vary from lender to lender but as a general rule of thumb, your business would need to be based in the UK, have a minimum of three months trading, a strong card payment history with a minimum revenue of £2,000 per month.
Most lenders will also consider additional data, your business performance and your own credit history.
How do BCAs work?
Here’s an example. Let’s assume a BCA provider grants you a £10,000 advance for an agreed upfront cost of £2,500 at a repayment percentage of 20 per cent.
So £12,500 is the amount you’ll eventually have to pay back.
Remember, the 20 per cent figure does not refer to interest, but rather the proportion of your future card sales that will go towards paying off the £12,500 debt.
If you receive £1,000 in card transactions in a day, you keep 80 per cent (£800) and the lender gets the remaining 20 per cent (£200).
Card sales may dip to, say, £500 on another day but you’ll still have to pay 20 per cent (£100) of the amount to the lender.
The crucial thing to understand about this model is because the repayment method is proportional, you’ll pay back more when business is booming, and less when things are slow.
The key point is that each of these transactions chips away at the £12,500 debt.
Are they loans?
BCAs aren’t technically loans, as the provider doesn’t take collateral as security or a personal guarantee as they would with traditional financing.
Depending on where you apply, approvals for bank loans can take over 72 hours and it could take up to seven working days for the money to enter your account.
This is partly because banks comb through personal and business credit information to ensure the recipient will be able to meet repayments.
Business cash advances are financed through a card processing firm, which is a different story.
Having masses of data on card transactions allows Worldpay and Paypal to save time on the due-diligence process because they can easily assess what revenue is coming into a business applying for an advance.
Worldpay says applicants can get a quote in 60 seconds and release funds within 72 hours, whereas Paypal claims that funds are generally transferred to the successful PayPal account in minutes.
‘BCAs allow me to buy more stock to sell during busy periods’
Andy Hall has secured 14 business cash advances in total from Paypal – the latest amounting to £60,000 – to fund his family-owned business House of Party, which specialises in balloons and party goods.
Andy Hall of House of Party (centre) has used business cash advances to buy new stock to maximise sales during busy seasonal periods
The company, founded in 2013, experiences seasonal fluctuations in sales – Halloween being the most lucrative period.
Hall told This is Money the advances go towards the purchase of stock to maximise sales during busy periods.
He said he went down the BCA funding avenue after being denied an overdraft increase from his bank.
He added: ‘We were growing at 110 per cent a year, but access to cash becomes your stopping point. We could sell what we had, but the problem was having the money to get the stock into the building in the first place.’
Will business cash advance work for my business?
BCAs offer flexible finance to modest enterprises – even those which have been denied a bank loan in the past.
Although net bank lending to small businesses was £700million in 2017, it has fallen since 2016 when it was £3billion, reversing previous growth from 2015 when it was £2billion, according latest report into small business finance by the British Business Bank.
The main advantage of cash advances is that very little oversight is required once they are set up and the total cost of the arrangement is agreed from the outset.
Emma Jones, founder of small business support group Enterprise Nation, says: ‘Initiatives such as these effectively bypass banks, remove complexity and allow healthy companies to agree fees up front so they can budget properly.
‘This is all fine if you’re on top of things and are using occasional advances to manage your cashflow properly. Where the trouble lies is when firms start to rely on them to get by.
‘That’s when you’ve got to step back and look at your finances in the round and work out where the problem lies,’ says Jones.
‘While cash advances such as these are a really affordable way to budget, they are not a replacement for real margin and profit.’
BCAs are typically short-term as repayment terms are normally months not years, according to Andy Yates, serial entrepreneur, angel investor and This is Money’s Start Up Doctor.
He also warns on getting locked into the agreement, resulting in mounting costs.
‘If your business needs longer term capital you may need to seek other financing requirements,’ he says.
‘Not all businesses are eligible for cash advances and they tend to be suited to companies with large volumes of card transactions.
‘In other words cash advances can be a great short-term boost for the right businesses, but like any financing you need to keep a close eye on costs, repayments and what is right for your business over the long term.’
How to work out the best finance option for your business
Most businesses need a little extra help at times. The important thing is to know whether additional finance is needed because the business is expanding and requires more resources, or because things are going badly and the operation is running out of money.
Banks, investors and business angels are always open to the suggestion of backing well run businesses with a strong sense of direction and good management team.
There are various sources of finance, but where to go to depends on whether you have a tried and tested business, or whether you are relatively new without much of a track record
For more information, read our guide on six ways to raise money to expand or start up.
Small Business Essentials