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  Management Feature

The Bank Said No … Now What?

Posted 4/10/2012
By Tony Colón

A merchant cash advance may be an option to consider if you are trying to access capital but your bank won’t OK your loan.

Today’s independent business owner has many business challenges, but few challenges are greater than experiencing a lack of access to capital through traditional lending institutions. Many banks have tightened their lending requirements and may be less likely to approve a business loan request.

Where does a business owner go to get the capital he or she needs for inventory, expansion, debt consolidation, new equipment, a remodel, purchase a new sign or other needs?

While there are a few options, there is one of which many business owners are largely unaware: a merchant cash advance. You may be scratching your head and asking yourself … what is a merchant cash advance? When AutoInc. asked a small group of members about this topic, several indicated they wanted to learn the pros and cons of such an option.

Do Your Homework Before Getting a Merchant Cash Advance

A word to the wise: Look before you leap when it comes to a merchant cash advance (MCA).

As the adjacent article points out, check out who you’re dealing with. Be sure it’s a reputable firm.

Sure, advances are much easier to qualify for than traditional loans – in some cases up to 90 percent of applicants are approved for amounts into the hundreds of thousands of dollars.

If this sounds easy or too good to be true, you’re half right. Merchant cash advance transactions can be expensive, and may carry onerous repayment terms. Factor rates are incorporated into the payments and usually start at 1.25 percent and sometimes can be much higher.

Traditional banks are regulated by state and federal agencies, but MCA providers are not, partly because they are buying receivables, not making loans. That technicality allows them to escape usury laws that prohibit lenders from charging exorbitant fees.

There are many reasons why a business owner may want quick cash. If owners are certain about the terms of the advance, are sure they can pay it back, and are willing to pay a slightly higher cost – the general consensus is it may be an option. But if a shop owner is in financial trouble and needs cash to stay afloat, he or she should avoid any kind of loan at all cost.

Editor’s Note: All financial considerations for a business should be made with caution and researched thoroughly. ASA neither endorses or opposes merchant cash advances as a business option.

A merchant cash advance allows you to leverage one of your greatest untapped assets: your future credit card sales. Simply put, a business agrees to sell a portion of future sales to obtain the capital needed today to grow the business. The merchant cash advance company charges a funding fee (generally referred to as a factor rate) that would be incorporated in the funding amount and would then retain a fixed percentage of your credit card sales (typically Visa/Master Card/Discover) until the advance has been paid.

There are many companies that offer this type of funding. Here are a few things to consider when selecting a merchant cash advance company:

  • Is it a reputable company?
  • Is it a Better Business Bureau member in good standing?
  • Is it a direct funding source or is it a broker?
  • Does it offer competitive funding factor rates?
  • Will it give you a written offer?
  • How soon could it provide you with the funds, once approved?
  • Does it require a personal guaranty?

As you can see, there are some things you should ask before considering a merchant cash advance, but in today’s credit market, it’s good to learn about all of the options to ensure you choose the best solutions for your business.

Tony Colón, CFM, is senior sales manager for Capital for Merchants LLC (a wholly owned subsidiary of North American Bancard) based in Troy, Mich. He is a merchant cash advance professional with more than 10 years of industry knowledge and experience. He can be reached at tcolon@nabancard.com.

 

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