In September 2017, the Futuregrowth Developmental Equity Fund finalised its acquisition of a significant minority holding in Retail Capital, a Merchant Cash Advance provider.
In September 2017, the Futuregrowth Developmental Equity Fund finalised its acquisition of a significant minority holding in Retail Capital, a Merchant Cash Advance provider. The process involved a lengthy due diligence, including an understanding of the legislative and regulatory environment, and finally, an involved Competition Commission process.
The following points provide a backdrop to this transaction:
How does Retail Capital differ from the usual lending businesses (i.e. what is Merchant Cash Advance)?
The “loan” differs from traditional lending businesses in that it involves the purchase of future cash flows. Quite simply put, Retail Capital advances a lump sum of the business’s future card sales and in return Retail Capital takes an agreed proportion of future card transactions until the total value that has been purchased (including the fee) is reached. In summary, this allows the client to use future card turnover as a way of raising working capital today.
What / who is their target market?
The Merchant Cash Advance product is aimed at the Small to Medium Enterprises (SMEs) that generate a large proportion of their turnover through card sales. The funding to SMEs is generally for stock, expansion, refurbishment or acquisitions, and also to assist with situations such as equipment failures, etc.
When we considered the investment, our first port of call was to ensure that we understood the SME market, with specific reference to access to finance as a key challenge facing SMEs. One would think that selling a product or service would be the largest hurdle for small business, but the lack of available sources of funding, specifically for working capital needed (i.e. buying stock, paying suppliers and staff, etc.) has resulted in many small businesses with great prospects closing their doors.
Is there an international precedent for this type of offering?
It is our understanding that the concept of the Merchant Cash Advance (MCA) originated in the United States, with the first company to offer an MCA product being AdvanceMe Inc. (established in 1998). Following their success, AmeriMerchant and Rapid Advance entered the market in the early 2000s. From research into the topic, we have seen that the US MCA market is significantly larger than the SA market. In addition to this, we have found evidence of the product offering in the European market with many of these European counterparties having an affiliation to US companies offering this product.
Why is there a need for the MCA product in SA?
In trying to understand the challenges facing SMEs, we found more and more empirical evidence that one of their main obstacles is access to finance, given the general absence of players offering a flexible product that would meet the needs of the SME. Traditional loan funding from the formal market generally requires collateral, which many of these businesses do not have, and is largely inflexible. The MCA product thus addresses this gap.
What prompted the investment?
After interacting with the management team for a period of 18 months, which allowed us to get to grips with the company and nature of the industry, we commenced discussions to support what is in effect a management buyout. What we had was a management team that fully believed in this business, with shared goals and beliefs. Given this, and our view on the developmental nature of the business, we were able to proceed with negotiations to conclude the transaction.