Business cash advance, also know as merchant cash advance has played a growing and changing roll in small business finance and is probably the most popular business loan alternative in the market today. Certainly it is the fastest growing.
I spend a large part of my day talking with business owners designing strategy of how best to get the capital they need for the growth, expansion or emergency in their business. The standard decision tree is fairly simple and focused on a few specific points.
1 – Is there another alternative that will provide a business loan or working capital. If the answer is yes, that will likely be a less expensive option. It may be more complicated and time consuming, but the cost savings will reward you for the aggravation.
In today’s environment, you should be the proud owner of a 700+ credit score, plenty of collateral and free cash flow more than double (or more) your debt service.
2 – Do you have a personal credit score (FICO) that is 690 or better? If yes, are comfortable with a personal guarantee, a “non-bank” business loan will reduce the cost of your business cash advance by 30% – 50%. Additionally, many of these program allow for repayment over 12 months rather than 6-8 months which is the standard in the business cash advance industry. You can expect a fixed daily or weekly repayment rather than a percentage of your credit card sales for repayment.
3 – Funding amount required? Even in a “normal” lending environment, no banker wants to be the only financing source. You may want to consolidate your loans and debts in one simple payment, but no banker wants to be that lender. So, expect to find the pieces and put create your funding from several sources.
You can expect to receive about 5% of the total annual sales you can prove (tax return) or about 1.5 times your monthly credit card sales.
4 – Do you have a FICO score between 525 -700? Been in business less than 2 years? In food service or retail? Sick or providing a personal guarantee for yet another business need?
Well, if you accept credit cards, business cash advance will likely be an alternative that provides you working capital without a personal guarantee or collateral. Business cash advance is great because it really works for real business owners, and most qualify for financing (about 80%).
As you get an understanding for the risk these financial firms take, you can begin to appreciate the cost structure that makes this capital expensive. Like most business decisions, it become a cost benefits analysis.
There are many players in this industry now who will not be around in another hear or two. Be sure to do your homework to protect yourself and get the best possible rates or hire a broker who will do all the research and leg work and allow you to make the final decision.
It will be a while before bank lending gets back to traditional acceptance rates which will create strong demand for business loan alternatives.
Have you had any experience with business cash advance or merchant cash advance you can share?
Part II: Non-bank business loans.
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