Most small business owners have more good ideas than the investment capital to implement those ideas. That is when the process of finding working capital typically begins. When that journey begins at the local bank, dreams die a quick and abrupt death.
Now what? The bank has said no, usually because a business owner has already sunk cash and personal credit into their business. Additionally, inventory and receivables are typically low when need for capital is greatest.
Truth is, traditional lending has failed small business for years. Long enough and often enough that an entire industry as blossomed to fill this vacuum – Merchant cash advance.
Merchant cash advance has stepped in to fill a void and is proving to be a great resource for cash starved small business owners. Attracted by the opportunity to have money deposited in their business account in less than two weeks, most business owners overlook problems and traps set buy some of the less scrupulous financing companies that have sprung up in this industry.
The premise is a very good one for many business owners. They can get cash today buy agreeing to sell some of their future business at a discount today. For example, a restaurant owner agrees to “sell” $40,000 of his sales over the next 12 months at a 20% – 25% discount. Translation, restaurant gets $30,000 or $32,000 deposited into their account today and will
automatically route 15% – 29% of their visa and MasterCard sales to repay the $40,000. Terms vary from company to company and based on several factors.
Owners appreciate the fact that they can get new working capital into their account in less than two weeks, but particularly like the idea that there is no personal guarantee and no collateral required for this capital. Additionally, because a percentage of their sales are used for repayment, there are not fixed payments to chock cash flow during slow periods.
Because this is an unregulated industry, it is still buyer be ware. Valery Davis was searching for capital to expand her technology business and receive a “quote” from one company to repay $95,000 while another company only required $89,800 for the same capital advance. Additionally, there are some companies that actually build personal guarantees into the fine print of their agreements. Be aware.
The upside for merchants, restaurant owners and franchisees that accept credit cards is that they receive money quickly and without any personal guarantees. Requirements such as near perfect credit, applications fees and volumes of documentation do not exist with this financing.
The downside is a higher cost of capital than a bank. In this transaction, the financing company takes 100% of the risk, 100% of the time. Given that, the 20% – 25% discount most companies charge, seems reasonable. Additionally, there is no loss of equity as there would be with venture
money or “friends and family”.
