Why Merchant Cash Advance is an ideal finance option for SMEs

An increasing number of businesses in India, even the smaller ones, are beginning to accept payments for their products and services via credit cards. The acceptance of credit card payments is not only convenient but also a boon for these units, as the same can be used to get short-term funding or advances from funding agencies. A merchant cash advance, as the name suggests, is a cash advance to merchants against their future credit card payment receivables.

Merchant cash advance is a relatively new form of funding in India for small businesses that need fast access to cash and have an established credit card transaction history. Widely used in the US and Canada for several years now, this type of lending is a convenient and easy method of raising funds. It’s not really a loan, rather an advance payment against the future income of a business. Merchant cash advance loans are an ideal solution for small businesses and entrepreneurs who lack adequate organized funding and often resort to borrowing from friends, family or unorganized lenders. They are emerging as an optimum solution for meeting the funding requirements of businesses with a regular income received via credit cards.

SMEs and Funding Options

A majority of the small and medium enterprises (SMEs) today operate with cash cycles of 60 days or more, but options for getting working capital finance are severely limited. Although the SME segment plays a key role in India’s economic growth, these enterprises suffer on account of inadequate funding options and thus resort to high interest loans from the informal segment.

Recent years have, however, witnessed the development of innovative products by non-banking finance companies (NBFCs) and micro lenders to fill the funding gap in the SME segment. Merchant cash advance is one such product that aims to help small businesses garner the necessary working capital by way of advances against the future income of a business.

Merchant Cash Advance: A Simple and Convenient Product

A merchant cash capital provider would give you a lump-sum amount, which is paid off automatically when they take a percentage of your daily credit card receipts. Since the repayment is linked to credit card receipts, this funding option is suitable for businesses that have a significant portion of their income via the credit card receipts. These include restaurant owners, online shopping sites, merchants and service providers.

The rate at which repayments are made or the retrieval rate can vary from 5% to 20% of the credit card receipts of a business. This retrieval rate is decided on the basis of the amount of advance, the quantum of sales via credit cards and the repayment period. Another important feature of this type of funding is that repayment begins immediately after the receipt of the funds with the total duration of the advance ranging between 180 and 360 days.

The amount of advance that a small business can get is determined by its average credit card sales. A merchant advance provider generally reviews your income inflow over the past six months to determine the advance amount that you can get. The funds provider generally ties up with the credit card payment processors with a predetermined percentage of the merchant’s credit card sales being transferred to the lender directly. The time taken to repay this advance is dependent on the percentage of credit card sales being given to the finance provider. The higher the percentage, the shorter is the time it would take to repay the advance.

Why Opt for a Merchant Cash Advance?

There are several reasons that make a merchant cash advance a preferred funding option for small businesses with high credit card transactions. These include:

1. Easy to Apply: It is very easy to apply for a merchant cash advance. All you need to do is to fill an online application form and upload the required supporting documents like your tax returns, bank account statements and credit card processing statements.

2. Quick Processing: Fund providers like Capital Float that rely heavily on cutting-edge technology take a decision within a few hours and deliver the funds within a few days. This is highly beneficial for businesses that require quick cash to cover unexpected business expenses.

3. Perfect Credit Score Not the Criteria: A merchant cash advance is sanctioned solely on the basis of the credit card receipts of a business and their consistency, without assigning too much importance paid to the credit score of an individual or business.

4. Unsecured Loans: A merchant cash advance is an unsecured loan that can be obtained without mortgaging any asset. No collateral is required and the focus is the future income.

5. Flexible Repayment: Since the repayment amount is a specific percentage of your credit card sales during a month, you are not overburdened or under pressure to pay more even during a lean period for your business or when your business is going through a rough patch and the sales are not up to the mark.

6. High Limits: Advance fund providers generally offer a higher borrowing limit than banks since they take their decisions on the basis of your future income.

7. No Impact on Credit Report: Since merchant cash capital is actually a sales transaction, it does not get reflected in the credit record of the business or the business owner.

A word of caution before you decide to take a merchant cash advance for funding your working capital needs. The cost of this type of funding may be higher than the loans taken from banks because the repayment is dependent on the factor rate of your advance. This factor rate is multiplied by the amount of advance to derive the total amount to be repaid. You can reap the benefits of merchant cash advance loans to fund your working capital needs by negotiating a lower holdback percentage. Although this will increase the repayment duration, it will help you minimize the cost.

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Everybody thought we were nuts – TOI

Written by Shilpa Phadnis. 

When Stanford MBA graduates Sashank Rishyasringa and Gaurav Hinduja started online lending startup Capital Float, it was counter-consensus. All around them they had naysayers, including investors who they had approached early on.

“You guys must be nuts -lending is not a business for you.” “It’s an offline business. You guys have to set up branches.” “Why don’t you guys start an e-commerce or a big data company.” These were some of the comments, recalls Sashank. About the only ones who believed in their idea were their parents.

The two worked with Baba Shiv, professor of marketing at the Stanford Graduate School of Business, to shape their idea of democratizing access to capital. “We wanted small and medium businesses to have access to credit on collateral-free terms.People needed loans against their business health and not against personal property,” Sashank says.

Capital Float started in 2013 and is the trade name of Zen Lefin, a non-banking finance company (NBFC) registered with the RBI.

Sashank, who was passionate about policy and development, was an engagement manager with McKinsey & Co in New York and India before he teamed up with Hinduja to start Capital Float. He graduated in economics from Princeton Uni versity and did an MBA from Stanford. Hinduja was the head of operations at Gokaldas Exports, overseeing one of the country’s largest apparel manufacturers.

 Banks, Sashank says, follow a cookie-cutter approach in assessing SMEs.Their lending policies are restrictive, collateral re quirements are inflexible and disbursements take up to 60 days. There are over 3 crore registered SMEs in the country and around Rs 7 lakh crore of loans have been disbursed through banks to them. But estimates show that the unmet demand is over Rs 9 lakh crore. “We wanted to use tech to bring agility to lending, become a lender as fast and flexible as a family member, but do it in a formal way ,” Sashank says.
Capital Float created flexible credit products that have helped SMEs get out of the clutches of informal sector financiers who charge high interest rates. One of the early customers was a mobile phone vendor from Bhilwara in Rajasthan. “He had pledged his house to get seed capital to start his business. He sold mobile phones on Snapdeal and had a great track record. From Rs 5 lakh a year back, he runs a Rs 50 lakh credit line with us today ,” Sashank says.
Capital Float has partnered with e-commerce marketplaces like Snapdeal, Flipkart, Amazon and Paytm to finance small merchants selling online. “We give an in-principle approval in 10-15 minutes after assessing the credit risk. Borrowers can apply online in minutes, select desired repayment terms and receive funds in their bank accounts in seven days with minimal hassle. We want to benchmark lending to the ecommerce experience,” Sashank says.
The company uses proprietary algorithms to check fraud and repayment history , and uses psychometrics to assess entrepreneurs’ payment ability . “We have taken the human bias out of financing and lowered the cost of lending,” Sashank says.

Now, with Rs 200 crore of loans disbursed, and $17 million raised from investors including SAIF Partners and Aspada, the early scepticism around their venture has more or less vanished.

News piece sourced from the Times of India. Read the original article here

Oct 24, 2018

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Advent of the Business Technologist

The tech revolution has caused several traditional roles to evolve and assume new dimensions and responsibilities in recent years. One such role is that of the Business Analyst (BA). Larger multinational companies were the original movers behind the creation of this unique role. All these organisations inevitably had one thing in common – meticulously planned and detailed organisation structures. In such an environment, BAs were tasked with continuously improving systems and processes while driving IT adoption across the board to govern the same.

The recent waves of start-ups resulted in the organic transformation of this traditionally vertical-based specialist into that of cross-functional professional with the expectation of being able to deliver on all fronts, cutting across business verticals. The prominence and necessity of such a role to drive strategic, tactical and operational excellence in the start-up environment, is now seen as more of a necessity than a luxury. These individuals, with evolved professional capabilities, are akin to the ‘Smart Creative’ that Google has postulated. They are hands on, driven by data analytics and are known to bring a fresh perspective to the table, consequently making them one of the most sought after employees in the market.

The advent of the Business Technologist has been triggered by the rise of sophisticated challenges that require a nimble response mechanism from a technological perspective. Businesses are constantly attempting to overcome new challenges as they arise. Technology, which is advancing at an exponential rate, becomes the perfect vehicle to address these challenges. Establishing a robust response mechanism to resolve them prepares the organisation to swiftly move on to the next challenge. Business technologists often become the architects and propagators of this change within organisations.

The stark contrast between the BA and the BT is highlighted in the overall responsibilities assumed by them. For instance, BAs are responsible for overseeing a process and ensuring that they optimise it to a state of best practice. BTs on the other hand are in a position to innovate and redesign the underlying process itself. This redesign can be caused by a variety of reasons, ranging from lack of IT adoption, the existence of better delivery models, to uneconomic business practices. It can even be a consequence of the process not being in line with the overall strategy of the organisation. Such is the liberty that is given to the BT.

The emergence of this professional leads us to the conclusion that success of technology does not depend merely on its adoption – it is more dependent on understanding the implications of its deployment in the most complex business environments. All this while ensuring that maximum value is being derived from these potentially capital intensive technology ‘solutions’. One may argue that this is the responsibility of the CIO or her team – someone whose role in the organisation is to work primarily on strategy or the execution of technology. However, given the dynamic nature of roles and responsibilities in the modern-day work environment, organisations must have BTs spread across business functions, as well as lines of business. The failure to do so is likely to result in sub-optimal efficiencies.

Much like the ‘rise’ of the ‘Business Analyst’, which was a direct consequence of the tech revolution, the age of the start-up has led to the advent of the Business Technologist. Sure, it’s not how you can expect anyone to introduce themselves in a corporate context. As a matter of fact, until a few years ago, the BT didn’t even exist. Today we can go ahead and safely say that such individuals must be well versed in a variety of disciplines – ranging from operations, business strategy, unit economics and talent development – to core technical areas such as IT, engineering architecture and others.

This distinctive role can also be compared to that of an in-house management consultant. The key difference between the two professionals is that the business technologists are not afraid to roll-up their sleeves and get their hands dirty. They will not stop at a prescriptive solution, but will get knee deep in the problem while attempting to solve it. The quicker the organisations embrace this evolved being, the faster these organisations can become flagbearers of the new phase of the technological revolution.

Arjun Nair

Arjun has a deep understanding of the Indian SME universe as a consequence of having dealt with this juggernaut for the last 5 years. Starting off his career at Tally, where he gained insight into this industry in a variety of areas including IT adoption, overall size of universe, etc. He now spends his days at Capital Float leveraging this information to increase customer acquisition. True to the article, he also spends his time ensuring cross functional synergy across functions in the organisation. From enabling the SME universe with IT at Tally he now wishes to empower them through financial inclusion.

Arjun is a Business Technologist at Capital Float

Oct 24, 2018

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6 Types of Business Loans Available to SMEs In India

The Small and Medium Enterprises (SME) sector is of key importance to the Indian economy given that it employs the second largest workforce in the country after the agricultural sector.

Statistics offer a clearer picture. Accounting for 45% of industrial output and 40% of exports, the SME sector can be a significant driver of economic growth. SMEs also produces more than 8000 quality products for the Indian and international markets.

In recognition of their significant contribution, SMEs are receiving a welcome push from industrial associations and government bodies. Yet their biggest challenge continues to be business loan requirements. Lack of timely financial help wreaks havoc on the growth of small businesses. Funding, if not received at the right time is of no use. Often, SMEs are turned away by traditional banks for a number of reasons. Further, the inflexible and complex loan application and approval processes of conventional lenders are discouraging for most small enterprises.

Fortunately, change is in the offing. Thanks to the growing presence of FinTech lenders, small and medium enterprises have reason to cheer. Business loan requirements for two different companies can never be the same. Keeping this mind, online lenders like Capital Float have stepped in to offer a wide variety of customized loans for business in India.

Here is a quick look at the bouquet of flexible credit products that Capital Float provides to SMEs.

Term Finance:

A quickly disbursed working capital loan, Term Finance is a great product for B2B service providers, manufacturers, traders and distributors alike. It helps fast-track business growth and boost profit margins. Term Finance is a convenient means to acquire fast business funding needed to meet your short-term requirements and ensure a positive monthly cash flow.

Online Seller Finance:

With the online selling space growing exponentially, there is an omnipresent demand for high liquidity. Our Online Seller Finance has made loans for businesses in India, especially e-commerce merchants, easily available. B2C and B2B marketplaces can get ahead of competition, expand to new markets and diversify into new product categories with the help of this customized credit solution. Attuned to your business ambitions, this collateral-free business funding ensures you have liquidity in the swiftest manner possible.

Pay Later:

An innovative financial product, Pay Later is ideal for SMEs with increasing orders in the pipeline and need to make supplier payments regularly. It greatly benefits those that can avail large cash discounts from suppliers. Pay Later works well for an enterprise with a base of blue chip suppliers, too. Carrying a predefined credit capacity customized for every applicant, Our Pay Later credit facility helps a variety of SMEs in times of cash crunch.

Merchant Cash Advance:

A simple and user-friendly business funding solution, Merchant Cash Advance ensures you have access to liquidity as and when required. Most suitable for restaurateurs and retail store owners, your unique business loan requirements are met in the most affordable manner. Active use of card payment devices offers an easy experience to customers. Point-of-sale machines aren’t just means of cashless transactions; they can become instruments for availing working capital finance. Merchants who earn revenue from debit and credit card swipes can avail of business funding through this tailor-made financial product. We offer working capital finance up to 200% on the merchant’s sales from monthly card swipes. Capital Float has partnered with multiple point-of-sale (POS) card machine vendors such as MRL Posnet, Pine Labs, Bijlipay Mswipe, ICICI Merchant Services, etc. Partnering with these vendors helps merchants access their customized working capital solutions.

Supply Chain Finance:

Enterprises often need to work with multiple suppliers. Using bills as financial instruments then becomes a given. Delays in payment are likely to impact the growth of a business. Fully comprehending the importance of correct timing, Capital Float’s Supply Chain Finance has been designed to come to the aid of small and medium business owners. This unique loan product takes care of cash crunch situations through accounts receivable financing, which instantly liquidates the SMEs bills into cash. A revolutionary way to put more money into your business by collateralizing your business’ outstanding bills, Supply Chain Finance enables SMEs to procure an advance of up to 80% of their bill value.

Taxi Finance:

India is witness to the recent boom in the radio taxi business. Finding an Ola taxi or an Uber cab is convenient and something one can do round the clock. Inspired by these success stories a number of people from diverse walks of life are looking at taking up work as drivers for tech-based taxi services. While it offers an easy means to earn a good income and hold a steady job, the taxi business needs basic investment in the tools of the trade— a car wired into a tech-based platform.

Taxi Finance, Capital Float’s innovative financial product, offers taxi drivers the freedom to earn more. With this loan, a taxi driver can now own a car, operate independently, and enjoy the benefit of flexible working hours. Capital Float has partnered with several reputed taxi aggregators to enable cab drivers to ply their cars on their platforms and substantially increase their revenue. The aggregator repays the loan installments by deducting the amount from the driver’s earnings on a weekly basis.

Taxi Finance offers a simple, affordable way to earn on the driver’s terms, providing easy business funding that is in stark contrast to business loans in India offered by traditional banking institutions.

Conclusion:

Unique business loan requirements underline the need for tailor-made financial products. We have financial solutions that cater to any SME’s working capital need. Minimal documentation and zero-collateral are among the unique selling points of these business funding solutions. Additionally, easy eligibility criteria combined with no pre-closure or hidden charges make these funding options SME-friendly. With instant approvals and quick disbursal of business loans, it makes sense to choose from one of our many innovatively designed financial products.

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Oct 24, 2018