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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2008

Get the Cash in Advance

Assist merchants with creative financing that can help fulfill their monetary needs

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.

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.

Another benefit of this kind of financing is that clients receive the funds they need within a couple of weeks instead of over the course of a year or more. Clients can use the money for whatever purpose they wish. For example, a broker may help a commercial client use a merchant cash advance to help finance a residential deal. The business-owner can use the cash advance to provide the downpayment.

Other uses of these funds include payments on past-due purchases or paying off delinquent taxes to increase the client’s credit rating for future transactions.

An additional benefit of cash advances is that they don’t show on any balance sheet or lien. Also, there typically aren’t any upfront costs, application fees or closing costs, and there are never any post-closing costs. In fact, the only cost the merchant experiences is the discounted purchase of future credit card sales.

Broker benefits

So, how do brokers benefit from these transactions?

As in every lending transaction, there are costs to receiving money. Instead of points and fees on the front end of the transaction, the lender and broker receive compensation from the increased discount fee charged to the merchant on each future transaction until the advance is paid off. This is called the factor, instead of the interest rate.

There are a number of financing options to use in determining broker compensation and amount of payback to the lender. Depending on the merchant’s financial needs, business growth and credit, the lender will offer several options from which the merchant can choose. Typically, the merchant receives approximately 74 cents to 80 cents on the dollar of credit card sales purchased. The remainder of the funds is used to pay the lender, as well as the broker and other intermediaries. It is common to see brokers making 3 percent per transaction, and some lenders even go as high as 10 percent in broker compensation.

In addition to monetary benefits, brokers have another product option to offer clients who need to bridge the gap in their finances. Merchant cash advances also provide brokers an opportunity to grow their relationships with bank managers, who can use this product as a source for capital when they are shy of a client’s goal.

Be sure to check out different factoring companies that offer this product. If they charge upfront fees, move on.

Although this financing can be expensive to some business-owners, it can be a bargain to others, particularly those looking to acquire additional working capital, pay off delinquent debt, or fill a gap between available traditional financing and the amount sought.

Mortgage brokers who can advise their clients on this alternative source of financing will prove themselves an asset and find new ways to make money in a difficult market. 


 


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