Earlier this week I read a very interesting, front page article in the Wall Street Journal that discuss how consumers are scrambling to raise cash now with the economy slowing. It is obvious to me that some of these decisions will very likely have a negative, long term impact on their financial health.
As business owners deal with this economic slow down, it is helpful to have simple criteria to help with your financial decision making. One helpful question: “Will this strategy harm my company by reducing its long term value”?
It is certainly more fun to manage your business in a time of economic growth. However, decision making during slow periods often have a more important impact on how well your business performs in the long run. Small business owners understand that during slow times there is less profit. It is the long term enterprise value of the company that you want to protect.
Here are some of the non-conventional alternatives that business owners could consider as they look for working capital to survive this slow economic period. I hope it helps you with your decision making and ask you to reply with other options you have considered for financing your company.
Negative Loss of Loss of Permanent Negative
Credit Asset Company Economic Tax
Option Impact Control Equity Loss Impact
|
No |
Yes |
No |
Yes |
Yes |
|
|
Home Equity |
Maybe |
No |
No |
No |
No |
|
Credit Cards |
Yes |
No |
No |
No |
No |
|
No |
Yes |
No |
Yes |
Yes |
|
|
No |
Yes |
No |
Yes |
Maybe |
|
|
No |
Yes |
No |
Yes |
Maybe |
|
|
Cash Advance |
No |
No |
No |
No |
No |
This economy is providing a wonderful opportunity for the business cash advance industry to prove its value to the business community. So far they have met that challenge as several companies have raised new capital to lend and are setting records for advances they are providing to business owners managing this recession.
While the cost of capital is more than traditional financing, it is available now and, when used properly, helps a business owner maintain or even enhancing the long term value of your company.
Yesterday I was reading an industry publication and the chairman of a fairly large Merchant Services company commented that merchant cash advance is “a great product for add-on sales because ti gives the sales rep the advantage of having another product line to sell.”
I absolutely hate that language. I hate the idea of someone, particularly an industry person, referring to merchant cash advance as a product. It reflects a lack of appreciation and understanding for what this financial tool can really do for business owners if designed properly.
Yes, there is an element of sales with merchant cash advance, but there is (should be) more craftsmanship and design than salesmanship. The language is a reflection of a dominate culture in many companies that are supposed to serve business owners, not sell to them.
Last week I spoke with a restaurant owner who did not take a business cash advance because they could not afford to give up 25% of their Visa/Mastercard sales for repayment. We designed a funding amount that only required a 14% repayment and they were able to put the new funds to work to improve and expand their summer dinning area.
A day spa owner did not take the working capital she was approved for because it required her to change her current credit card processor. We arranged funding with a company that allowed her to keep her processor and sales are up over 12% with the new equipment she has in her spa.
A vet with a very successful pet hospital in Illinois had excellent personal and business credit and also needed equipment for her clinic. She did not like the expense of traditional business cash advance but did like the significant discount we arranged for her because of her credit profile. New equipment arrives next week.
I offer these as examples of carefully designed solutions, not products. As long as sales people view merchant cash advance as a “product” to sell instead of a solution to design and customize, the marketplace will remain under served.
Maureen Farrell is a staff writer at Forbes.com and I think I can tell from her recent article that she is an academic who never had to make payroll or struggle for capital. T
Most business owners seem to be pleased to have the opportunity to make a choice between “expensive” capital and none at all. Without this type of financing, who would provide the money to grow thousands of small business…the bank? The mortgage industry? Forbes? (Which I love by the way).
What surprises me is that Forbes knows how the free markets work. Capital flows in because of demand and because these funding companies can make a profit to justify their risk without regulation created by beaurocrats to protect business owners from themselves. If there is a great demand for merchant cash advance, it is because there is a great need not being met.
She also makes it seem like this is a product newly popular because of the recent credit crunch. In fact the industry was been around for 10 years now and provided over $500 million of financing to small business owners of all credit profiles in 2007.
I am also a small business owner and collectively we are the largest employer in the Unites States. We have a long history of being the back bone of American business and the engine of creativity. I am surprised Ms. Farrell and Forbes would not give us credit for having the ability to make intelligent business decisions about capital and the growth of our businesses.