A merchant cash advance is the sale of future credit card sales or other receivables. Companies with predictable cash flow from sales can use this practice to smooth out cash flow. Essentially, the financier offers money up front for the right to collect a portion of a company's future sales. The financier generally replaces the merchant's credit card terminal with one that can direct part of those credit card sales to the financier's accounts. Often, this kind of financing is offered in conjunction with credit card processing services. Rates tend to be higher than traditional financial sources, but the service is usually available to any merchant processing more than $2000 to $3000 in credit card transactions each month.
Industries like grocery stores, restaurants, and auto-repair shops have a harder time than most when looking for traditional funding, due to lower profit margins, and the difficulties in recovering funds if the borrower defaults. If you're one of the many businesses which can't qualify for traditional bank loans, even though you have good credit, Merchant Cash Advance might be the best solution for you to get the working capital you're looking for. Most MCA programs allow you to use funds to pay off vendors and loans, advertise, purchase equipment or inventory, or expand into a new location.
Merchant cash advance companies lend out their money to merchants in return for the merchant's future credit card sales at a discounted rate. The investor's profits come from taking a percentage of the merchant's credit card receivables until the merchant has paid back the amount borrowed. Since all payments are automatically taken from every credit card transaction, there is no way for the merchant to incur late fees, and therefore no need to guaranty the loan with collateral. If the merchant's business slows down, then the merchant simply pays the advance back slower, with no penalties, extra interest, or more punitive sanctions. Another advantage of MCA is that the merchant can usually receive more funding before their current cash advance is paid in full.
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Businesses Turn to Merchant Cash Advances Due to 2011's Continuous Economic Downturn, Merchant Cash in AdvanceNew business owners who need an instant access to cash for capital are in luck. There is an emerging industry that wants to help them. These are merchant cash advance providers, namely MerchantCashinAdvance.com. This is a relatively new player to the credit granting bodies. They have only been around for ten years but have grown significantly to more than 50,000 providers for 2011.
Strong Credit Card Sales Leave Merchants With an Alternative to Business Loans:
Regulators are now swooping down in terms of scrutiny and the merchants are in a huddle to promote industry standards. These merchant cash advance providers offer a lump sum payment to businesses. In exchange, they get a share of sales in the future. Companies that are targeted are mostly retail, restaurant and service oriented businesses. These usually have strong credit card sales but have bad credit. This means they don't qualify for loans. The question here for businesses that take avail of the offer is how much do these advances compare to an interest on a loan or credit line.
Keep in mind, receiving Merchant Cash in Advance is NOT a loan. No collateral or require requirements. MerchantCashinAdvance estimated a 95% approval rate for new merchants looking to obtain merchant cash advances.
According to Leonard C. Wright, an accountant for San Diego and a columnist for the American Institute of CPAs, the interest rates can go from 60% to 200% APR. He recommends businesses to have no other options to go for the cash advance but fully understand what the costs are. Merchant cash advance providers are protesting the allegation. They remain that they are not loans. Instead, the deal they get from the cash advance is a purchase or a sale of an income that they will get in the future.
Can pay less
Interestingly enough, merchant cash advances are not under the obligation of law that otherwise regulates lenders and puts ceilings on interest rates. They do not require a fixed payment and instead collects a regular percentage out of the merchant's daily credit card sales. This goes on until the advance and premium is recovered ideally in less than 12 months. The advantage to this says merchant cash advance business owners is that their payment is dependent with their cash flow.
Uniquely, MerchantCashinAdvance.com charges 0 percent interest on merchant cash advances.
"They can pay less when business is slow in certain months."
Merchant Cash Advances have NO scheduled due date or monthly payments. Most importantly, businesses have opted for merchant cash in advance because it has no reflect on the applicant's credit.
This differs from a credit or loan where there is a set date when they need to pay. Fixed payments also have to be done on a schedule.
"In a merchant cash advance, there is no schedule of fixed payments and there is no due date" says a representative of MerchantCashinAdvance.com, the pioneer in the merchant cash advance industry.
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1. Create a logo and put it on everything
Logos work wonders. The sooner you can create an image and/or color scheme that correspond to your business, the sooner customers will be remembering who you are. Not only should you use your logo on correspondences and business cards, but you can also easily add it into your website, and your social media accounts. A business with a strong logo is much more likely to be remembered than its competitors.
2. QR Codes
QR Codes are all the hype these days. However, because they are simply a black and white pattern that look similar to all other QR codes, you will want to think of a way to set your business apart. One creative way of doing this is to create ads that essentially force your audience to scan your QR code to figure out a solution to a problem. For example, your QR code could function as the punchline to a joke or the answer to a tricky question.
3. Spend time on online forums
Social media marketing is not all about Facebook and Twitter. Good old online forums still prove to be valuable sources of information as well as free marketing. Interact with other business owners as well as a targeted group of customers and specialists in your industry. Many forums still permit that you add a link to your own business in the signature of your forum postings, which lets other users know what you're all about.
4. Press Releases
You don't need to go through a PR company to create and distribute a press release about your new business. The reality is, everyone knows at least one person who is a good writer, and any writer who doesn't already know the format of a press release can learn it quickly. Once you have the actual release, there are hundreds of free Press Release directories online that are very inexpensive, if not free, to submit to.
5. Form connections with bloggers
Popular local bloggers can be one of your best assets when spreading the word about your business. Especially if these bloggers specialize on writing about events or locations in your area, you can really capitalize on free advertising by asking the blogger to include an update about your new business. Explain to the blogger what's in it for them; real estate on popular blogs can be pricey, so must bloggers won't want to write about you unless there is at least something small that they get in return.
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As attention grows, providers of the loan alternative are trying to avoid regulators' scrutiny. Here's what you should know about the industry. -- By John Tozzi
Small-business owners who need quick access to capital have a burgeoning industry eager to fund them: merchant cash advance providers. The decade-old industry has grown significantly in the past two years, to more than 50 providers, observers say, and the tight credit environment is fueling demand. As interest in their business grows, providers who charge premiums of 30% or more on the money they advance are trying to promote industry standards to avoid scrutiny from regulators.
Cash advance providers offer businesses a lump sum payment in exchange for a share of future sales. They mostly target retail, restaurant, and service companies that have strong credit-card sales but don't qualify for loans because they have bad credit or little or no collateral. The catch for takers is how much cash advances cost compared with interest on a loan or credit line. The equivalent interest rates can range from 60% to 200% APR, according to Leonard C. Wright, a San Diego accountant and "Money Doctor" columnist for the American Institute of CPAs. He says that may be acceptable for companies with no other options, but business owners need to treat the advance like a loan and understand what the costs are.
Merchant cash advance companies take pains to point out that advances are not loans; instead, the deal is a "purchase and sale of future income." That means that merchant cash advances are not bound by laws that regulate lenders and limit interest rates. Instead of requiring regular fixed payments, they directly collect a set percentage out of a merchant's daily credit card sales until they recover the advance and their premium, usually in fewer than 12 months. Advance providers say businesses benefit because the amount they pay varies with their cash flow, so they pay less in slower months. "When a business takes a loan, they have a firm date that it has to be repaid; they have fixed payments that have to be made on a schedule," says Mark Lorimer, chief marketing officer of Kennesaw (Ga.)-based AdvanceMe, which pioneered the industry in 1998. "In a merchant cash advance, there is no due date, there is no fixed payment."
ROOM FOR GROWTH
Observers see plenty of room for growth in the merchant cash advance industry. Advance providers have penetrated just 10% of a market potentially worth $5 billion to $10 billion in outstanding advances, says Marc Abbey, managing partner at consulting firm First Annapolis, who has researched the industry. Most business owners who use merchant cash advances would prefer conventional credit, Abbey says. But if they're unable to borrow, some swallow hard and take the high-cost advances.
Tony Boulton, owner of the three-person kitchen supply store Design & Grace in Grapevine, Tex., got $20,000 from AdvanceMe in 2007, which cost him $27,000 in credit-card sales. He renewed for the same terms when his first advance was paid for, because he needed the money for working capital. Boulton says he'd rather have a bank line of credit, but he's been repeatedly turned down. "It's the only way that I've found of getting funds that I need," he says. "The sooner I can get out of it, the better. But right now it's the only option I have."
The costly funding is not for every merchant. Jim Amato, a former CPA who now owns a seven-employee wine store in Baltimore with $1 million in sales, considered a merchant cash advance to fund store renovations because banks wouldn't accept his liquor inventory as collateral. Bethesda (Md.)-based RapidAdvance offered him a $42,600 payment in exchange for collecting $59,788 of his credit card sales, which they expected to recoup in nine months by taking 18% of Amato's Visa (V) and MasterCard (MA) transactions. Taking the advance would be the equivalent of borrowing at about 50% APR. "Basically I would be in a loss situation immediately," Amato says. He passed.
Without commenting on Amato's situation specifically, RapidAdvance President Jeremy Brown says responsible merchant cash advance companies are careful not to retrieve so much money from a customer that the business won't be able to survive. "If you're operating under a very thin margin like a grocery store, for example, you have to be very careful with that retrieval rate," he says. Advance providers typically collect between 8% to 10% of gross sales, Brown says, but in the case of a low-margin business, they might collect just 1%. AdvanceMe has a self-imposed limit of retrieving no more than 9% of gross revenues, Lorimer says.
BAD APPLE WORRIES
However, Brown and others in the industry readily admit that some merchant cash advance companies don't act responsibly. Industry leaders say they're trying to promote best practices to avoid attracting regulators' attention. (An AdvanceMe whitepaper describes the challenge: "Regulate ourselves, or someone is likely to do it for us.") To that end, Brown formed a trade group, the North American Merchant Advance Assn. last April. "They all consider a gunslinger to be a real risk for the industry," says Marc Abbey of First Annapolis.
Brown says he's particularly concerned about how merchant cash advances are represented by third-party brokers, who are a major sales channel for the industry. "We do worry about how they're presenting the product. Are they explaining it properly?" he wonders. Reports that out-of-work mortgage brokers are flocking to the merchant cash advance industry—a development one company announced in a press release in March—also raised concerns about responsible business practices.
Some critics say merchant cash advance providers are simply lenders skirting usury laws. Anat Levy, a Beverly Hills attorney, filed a federal class-action suit against AdvanceMe in May claiming that the company's advances are thinly disguised loans and should be regulated as such. AdvanceMe and other merchant cash advance companies say they do not ask for collateral or personal guarantees, and they assume the risk if a business fails. But Levy says business owners who take advances have to agree to "very broad, very ambiguous clauses" that can leave them on the hook if the business goes under. "If you change the pricing of your menus, you've breached the contract," she says.
AdvanceMe would not comment on the pending suit directly, but Lorimer called the idea that the company would pursue an owner's assets based on a menu change "absurd." Lorimer adds that three out of four customers renew their advances, and AdvanceMe has an interest in keeping them healthy. He says AdvanceMe wants to deal with businesses that are using advances to grow or improve their companies, not as emergency rescue funding. "If a business goes out of business, then we take the loss," he says.
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But the financing alternative is technically not a loan.
Merchant cash advance providers are not subject to the state and federal regulations that apply to banks. Rather than making loans, merchant cash advance providers purchase future receivables at a discount. You give the discount in exchange for the quick access to cash. In subsequent months, every time you make a credit card sale, a portion of the revenue is forwarded to the provider until the entire amount has been repaid.
Merchant Cash Advances and Bank Loans: How They Differ
Here are other ways in which a merchant cash advance differs from a bank loan:
- Less paperwork. The process of getting a merchant cash advance is quicker and far less onerous than a bank loan. Typically you get cash in less than a week.
- Higher approval rates. You must show a track record of debit or credit card receivables to qualify. Many business that cant qualify for a commercial loan can qualify for a merchant cash advance.
- No collateral. You do not have to put your assets, such as your home, on the line as collateral for a merchant cash advance.
- No use restrictions. You can use the money any way you choose.
- No fixed payback schedule. You repay the cash advance according to your sales. If business is down, your repayment slows.
Merchant Cash Advances Pros and Cons
Critics note that merchant cash advances are more expensive than bank loans. Yet in todays tightened credit market, commercial bank loans and credit lines are difficult to come by, especially for small retail businesses and restaurants. Merchant cash advances are sometimes the only alternatives for businesses to solve cash flow problems or get the money they need to expand.
Our next article in this series provides answers to frequently asked questions about merchant cash advances.
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