As published in Scotsman Guide's Commercial Edition, October 2008.
Running a business in today's environment can be extremely difficult. Ongoing trouble in the financial-services industry continues to make business capital difficult to achieve. This marketplace makes creative financing even more valuable to business-owners.
There are several creative financing options that can help businesses achieve working capital. These include accounts-receivable factoring, purchase-order financing, installment-contract financing and secured financing.
These products can help alleviate the credit crunch for business-owners, and they are not necessarily secured by real estate. Another such product, merchant cash advances, provides businesses nationwide with the working capital they need by offering cash advances on future earnings. The way it works is simple: The lender purchases a percentage of the business-owner's future credit card receipts and advances the future earnings to the business-owner upfront.
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Who is eligible?
To use this product, most lenders will require that the business-owner switch merchant-processing companies, which will allow the lender to recoup the money from each transaction in the next nine to 12 months, on average. The lender then deducts a small percentage daily from the business's credit card sales. It's that simple -- no upfront costs to the client, minimal qualification requirements and quick access to capital when banks are not an option.
Clients who can answer yes to the following questions may make good candidates for merchant cash advances.
Are you the owner of a small- to medium-sized retail, service or hospitality business?
Have you been in or owned the business for at least one year?
Does your business accept credit cards?
Can you provide processing statements for the previous six months?
Have you earned at least $2,500 per month in credit card sales during that time?
Because this form of financing isn't a loan, there are no monthly payment books and none of the hassles that can come with dealing with a traditional bank.
Benefits of cash advances
For those merchants whose businesses need a quick injection of capital, this program offers an aggressive alternative to traditional bank lending.
Merchants that need fast funding and don't wish to pledge personal assets or prove their income often find this a viable solution. For merchants that are "bankable" and can acquire funding from traditional sources, this program can provide gap financing. For example, a merchant that has a $100,000 project and can only secure $75,000 in bank financing might be able to receive a cash advance for the remaining $25,000. The merchant's daily activity will not change; the lender simply uses future credit card sales as the method to pay back purchased sales.
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