The recent slight rebound in the United States macro-economic climate has resulted in a lot of entrepreneurs seeking working capital for their businesses. As a result of this, most smart entrepreneurs have already or are in the process of analyzing the different business cash options that are open to them other than the banks which are still on lock down for small business loans. When theses business owners do Google searches they find lots of information from the hundreds of sellers on the advantages and benefits but none on some of the limitations.
At American Finance Solutions, we like to give our clients the complete picture of all the pros and cons so that a business owner can make a intelligent decision on offers. I will try to summarize the cons and limitations which can be divided into three major areas:
1. Cost - The factor rate of a merchant cash advance is much higher than a traditional SBA or business bank loan. The primary reason for the higher rates is that the funding companies are taking much more risk with low documentation, unsecured financing and compared to conventional loans. This is also one of its advantages as the due diligence or underwriting criteria allows many more business owners access to capital. The basic market forces of supply and demand still apply to MCA financing, so it pays for business owners to shop around and find a good rate with minimal out of pocket fees.
2. Qualification - This area can be broken down into two sub-sections of qualifying for an MCA outright and how much a business qualifies for in funding. As a start up, for a businesses first location you will not be able to use a merchant cash advance because there is no sales history for the funding company to base its expected collection for credit card sales. You will need a minimum of four months credit card processing history to qualify. In addition, a business needs to have some minimum level of credit card processing volume, most funding companies require $3,000 to $5,000 per month to guarantee some form of payment.
How much a business owner qualifies for can be based on several different criteria that varies for each financing company. Most reputable companies base the amount financed on a combination of total sales, acceptable remittance rates for the businesses SIC classification and overall affordability on personal/business criteria. As always, your best bet is to negotiate the best contract that minimizes the impact of payback on the businesses cash flow. We've seen too many good business owners pushed into bad contracts that take too much from a business credit card receipts and forced to close.
3. Consistency - When applying for a business cash advance give the funding company the complete story of your business so that they can create a contract customized for the volume of your credit card receipts. After the contract is funded as a financing company we expect consistent volume for expected repayment. Due to fraud by less than honest merchants, the funding companies know that if your volume drops more than ten to 15 percent that the business owner is diverting sales and violating the terms. This results in getting black listed by the industry, unpleasant phone calls for the collection departments and usually penalties and automatic ACH payments being deducted from the business' bank accounts. Make sure you read all the find print of the contract and have all questions answered directly by the funding company! At AFS we actually prefer it when a potential client asks for clarification and understands all the responsibilities of us and them. It always results in a smooth contract and happy customers that almost always repeat.
If you business is seasonal let the funding company know ahead of time. American Finance Solutions is the specialist in providing merchant cash advances for seasonal business. We usually request 12 months of your previous credit card processing statements. This allows us to set the correct expected payback each month and then build a contract that works for both parties.
There are a few other limitations that we usually specialized to a specific industry or other factor. But the above covers 90 percent of the cons.
At American Finance Solutions, we like to give our clients the complete picture of all the pros and cons so that a business owner can make a intelligent decision on offers. I will try to summarize the cons and limitations which can be divided into three major areas:
1. Cost - The factor rate of a merchant cash advance is much higher than a traditional SBA or business bank loan. The primary reason for the higher rates is that the funding companies are taking much more risk with low documentation, unsecured financing and compared to conventional loans. This is also one of its advantages as the due diligence or underwriting criteria allows many more business owners access to capital. The basic market forces of supply and demand still apply to MCA financing, so it pays for business owners to shop around and find a good rate with minimal out of pocket fees.
2. Qualification - This area can be broken down into two sub-sections of qualifying for an MCA outright and how much a business qualifies for in funding. As a start up, for a businesses first location you will not be able to use a merchant cash advance because there is no sales history for the funding company to base its expected collection for credit card sales. You will need a minimum of four months credit card processing history to qualify. In addition, a business needs to have some minimum level of credit card processing volume, most funding companies require $3,000 to $5,000 per month to guarantee some form of payment.
How much a business owner qualifies for can be based on several different criteria that varies for each financing company. Most reputable companies base the amount financed on a combination of total sales, acceptable remittance rates for the businesses SIC classification and overall affordability on personal/business criteria. As always, your best bet is to negotiate the best contract that minimizes the impact of payback on the businesses cash flow. We've seen too many good business owners pushed into bad contracts that take too much from a business credit card receipts and forced to close.
3. Consistency - When applying for a business cash advance give the funding company the complete story of your business so that they can create a contract customized for the volume of your credit card receipts. After the contract is funded as a financing company we expect consistent volume for expected repayment. Due to fraud by less than honest merchants, the funding companies know that if your volume drops more than ten to 15 percent that the business owner is diverting sales and violating the terms. This results in getting black listed by the industry, unpleasant phone calls for the collection departments and usually penalties and automatic ACH payments being deducted from the business' bank accounts. Make sure you read all the find print of the contract and have all questions answered directly by the funding company! At AFS we actually prefer it when a potential client asks for clarification and understands all the responsibilities of us and them. It always results in a smooth contract and happy customers that almost always repeat.
If you business is seasonal let the funding company know ahead of time. American Finance Solutions is the specialist in providing merchant cash advances for seasonal business. We usually request 12 months of your previous credit card processing statements. This allows us to set the correct expected payback each month and then build a contract that works for both parties.
There are a few other limitations that we usually specialized to a specific industry or other factor. But the above covers 90 percent of the cons.
