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Tuesday, July 15, 2014

In A Pinch For Cash? A Merchant Cash Advance Worked For This Business

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With $700,000 invested from his partners and a healthy investment of $500,000 of his own, Brian Benson figured he had the financing  of his restaurant knocked.  But as construction dragged on, and costs for site plan revisions mounted, his 3,000 sqft restaurant, The Yucaton Taco Shack, ran $80,000 over the original budget.

Budget overruns sucked away from the operating cash Brian had set aside.  From the September 2011 open, business was brisk.  But the loss of that operating cash made things tight.  So just one month after opening, Brian decided to apply for a merchant cash advance through  A merchant cash advance is not a lone.  It is a financing tool in which future sales are purchased at a discount in exchange for cash up front.  The cash advance is then repaid by taking a small percentage of credit card sales each day.

Though such financing is more expensive than a traditional bank loan, they can be obtained fast, often in less than 72 hours.  By comparison a business loan can take weeks to arrange and typically ties up collateral, or requires a personal guarantee by the owner.  Not so with a merchant cash advance.  There is no fixed payment terms.  Since payments are taken as a percentage of sales, the business won't suffer fixed monthly payments when business is slow.  When business is good, the advance is paid down quicker.

Why did Brian choose this route?
Brian said they needed that money to operate. He didn't want to drain the business's bank account at startup and he didn't want to give up more equity to his investors.  Nor did he want to put in more money himself.  The advance was expensive, but it made sense for Brian situation.

What did the process involve?  Brian showed them weekly retail receipts of $35,000 for their first month.  Flashadvance checked Brian's credit and he provided the company operating agreement.  Brian received $80,000 in cash and he paid back $100,000 through a 12% discount on Visa, Discover, and MasterCard sales every day.  Although he admits it is "expensive moneyy" he said he didn't feel the pain because its a small amount of daily sales rather than a large monthly fixed payment.

What advice does Brian have for those considering a merchant cash advance?   "Be sure of your sales numbers and costs before entering into a deal like this.  It can kill you very easily if you miscalculate your operating expenses.  It works great if you have relatively strong sales and can pay the advance back in 6-8 months.

Should The SBA Get Out Of The Way For Alternative Lenders?

Should The SBA Get Out Of The Way For Alternative Lenders?

Capital to Main Street  
By far the #1 complaint you hear from small business owners is the difficulty in obtaining working capital to operate or grow their business.   Main stream community bankers are continually moving farther upstream searching for more lucrative business deals in an effort to compete with their bigger rivals.  But this has lead to a shortage of capital for the businesses employing the very community banks serve.  Perhaps it is time for a paradigm shift.  Perhaps we should change the way we look at the role of non-bank lenders, e.g. alternative lenders.

In 2000 the majority of lending for small business took place at local banks, or at a local branch of a national bank.  But by 2014 that shifted.  Non-bank lenders are giving traditional bank lenders a run for their money providing more business access to capital.

Case in point, among the top 100 SBA lenders, Wells Fargo leads the pack with a little more than $266 million in small business loans.  Yet the non-bank lender OnDeck approved more than double that amount last year. 

OnDeck has posted 150% growth and more than $825 million in loan volume since it started in 2007.  According to one estimate by Bloomberg, OnDeck's loan volume for last year alone surpassed $475 million.  With numbers like that you have to wonder if it's time for the SBA to begin including non-bank  lenders like OnDeck as SBA members

Other SBA Lenders Alternatives?
So what criteria would be required for an alternative lender to be accepted for inclusion in the SBA loan guarantee program?  Most likely it would require a regulation at some level and a process for approval.  However, non-bank lenders like CAN Capital, and dozens of  merchant cash advance firms have figured out how to take a different underwriting approach to approve potential borrowers that streamline the process while protecting their assets.

Is it time for the SBA to recognize, dare I say legitimize, the alternative non-bank lending industry and allow them access to the same loan guarantee programs as traditional bank lenders?  Would this not lead to, or at least accelerate, a decrease in the fees, or loan rates, that borrows pay?  Isn't that a good thing?

I'm a long time advocate of community banking and I recognize that small business bankers are trying to help provide capital to businesses within their communities.  But the challenges facing small business owners to obtain capital can't be denied.  If non-bank alternatives meet their needs and can be done safely, why should the SBA not acknowledge that?

A Merchant Cash Advance May Be A Good Alternative For Small Business Financing

Often new businesses or a rapidly growing business can have trouble accessing operating capital to sustain their growth.  In such cases traditional bank loans are often not available do to credit ratings or collateral.   But a merchant cash advance is not a traditional loan.  In fact, it is not considered a loan at all.  It is a purchase of future sales paid in advance for a fee.

Since the beginning of the credit cruch in 2007-2008, banks have been tight with money, making traditional business loans unobtainable by many otherwise solid businesses.  The Obama administration has urged lenders to loosen their grip and increase lending to small business in hopes of stimulating a stagnant economy.

The Plain Truth about a Merchant Cash Advance

A merchant cash advance is not a loan in the traditional sense.  It is a purchase of future credit card sales in exchange for an advance on those sales in cash.  The advance is paid back by taking a small percentage, typically 10%-15% of each credit card sale.  The repayment period is typically 8 to 12 months. There are no fixed monthly payments.  If business is slow, the payments are reduced.  So for many, this is a relatively painless, cashflow effective, alternative to a traditional bank loan.  No collateral or personal loan guarantees are required.

Although these types of access to operating cash is expensive, tight bank credit has forced more and more business owners to turn to less traditional methods of obtaining operating capital.

There is a Premium Attached To That Money

Although there is no interest rate connected with a merchant cash advance, the advancing company collects a "premium" from the advance.  For example company requesting a $50,000 advance on their credit card sales my be required to payback $60,000 over a 8-12 month period.   If you calculate that as an interest rate, the merchant cash advance appears to be very expensive.  You may be tempted to just finance your operations with a credit card instead.  However, the big advantage of a merchant cash advance over credit card financing is that the monthly payment is effectively tied to your sales.  While you may have a $1,000 payment due on your credit card each month, the pay back on a merchant cash advance will fluctuate with your sales. 

Does that Mean a Merchant Cash Advance is a Good Alternative?

There are many alternative financing options, a merchant cash advance is just one of them.  However, in a tight credit market, businesses often are forced to turn to expensive financing options to keep their doors open.  A merchant cash advance is basically the same as "factoring" your sales, in which you receive a payment advance on an invoice to a customer.  But with merchant cash advances, the receivables mechanism is credit card sales.

Business cash advances like these have helped many mall business survive in a tight market driven by recessionary pressures.  However using a merchant cash advance as a long term financing solution may not be the best option since it can heavily impact your profit margins.

One excellent source you might check out for a merchant cash advance is Flash Advance, a reputable source of Merchant Cash Advances.

During a credit crisis small businesses relaying solely on traditional bank loans may not survive.  In these situations alternative funding sources like a merchant cash advance may be a reasonably good strategy.