Many clients call AFS all the time when shopping for the best rates for a merchant cash advance. Most of the time the first question is, "What is your best factor rate?" While this is one important part of the quote, you cannot compare it without the second part of the equation which is the withholding rate.
At AFS we've written contracts from a factor rate of 1.1 (providing $10,000 in funding for $11,000 of future credit card receivables) all the way up to a 1.5 (providing $10,000 in funding for $15,000 of future credit card receivables). They key element is how fast do you expect the MCA provider to be collect the amount of the contract.
For example, a merchant that does $20,000 per month on credit cards consistently. Might get a quote for $20,000 in funding with factor rates of 1.3 and 1.4 from two different companies. If they both have the same withholding rate of 30% of credit cards then its easy to identify which is the best deal.
If the 1.3 factor rate has a withholding of 25%, we would expect the MCA provider to collect the $26,000 over 5.2 months. Now if the 1.4 factor rate quote has a withholding of 20%, the MCA provider will collect over 7.0 months. As a business owner the merchant will need to ask him or herself two important questions:
1. Is the higher factor rate worth the longer payback period?
2. Can my cash flow afford the withholding percentage?
Often we have clients that want a factor rate of less than 1.2 and generally MCA providers have no problems with providing a low factor rate. In fact, MCA providers generally prefer lower factor rates, because they collect on those contracts over a shorter time frame, thus lowering their risk on funding the contract. However, most reputable MCA providers also recognize that they can quickly put a merchant out of business if they withhold too much of business' credit card sales. Most MCA providers limit the amount that they expect to collect from a merchant to 11 to nine percent of the business total gross sales.
When comparing quotes remember the old time/value of money rule. The longer you have the funds, the more it is going to cost due to greater risk of default. Don't forget to deal with only reputable companies that have a proven track record and will around for the long haul to support your business for years to come. Most MCA providers offer discounts on subsequent contracts since the merchant has demonstrated a proven track record in paying back a contract.
April 19, 2009
April 5, 2009
How To Shop For A Merchant Cash Advance
Merchant cash advances are a great option for financing when a business cannot get a traditional business loan or does not have the time to wait for a loan to close. Unfortunately there are a few providers that charge additional fees, dramatically increasing the cost of the financing or have restrictions that do not fit a particular business.
When seeking a merchant cash advance make sure you find the right financing institution to fit your business' needs.
- Make it a priority to seek a merchant cash advance that requires no closing costs.
- Avoid initial, up-front fees including application fees, credit report fees and any other fees. Negotiate or seek a merchant cash advance provider that can wave initial fees.
- You may be asked to provide collateral to obtain a merchant cash advance. If your merchant cash provider requires it then the rate should be dramatically lower because it is now secured financing.
- Some merchant cash advance providers require that the business provide financial statements. Most require them for larger funding amount ($50,000 or more)
- Avoid any minimum payment requirements in the MCA contract. Some contracts require that a minimum amount be collected. The beauty of the MCA is that payback is tied directly to the business' cash flow. So, when the business is doing well, it pays back faster and just the opposite when its slower.
- Find the right collection method for your business. Most MCA providers have the business change their processing over to a credit card processing company that splits the credit card batches. If you can't change credit card processors, some may offer a trust account (also known as a lock box) collection method, where all credit card proceeds are deposited into a separate checking account then the business receives its proceeds via ACH. Some MCA providers may also offer a fixed payment collection where they collect a set amount based on the average credit card sales a business does. For example a business does $100,000 a month in credit card processing and enters into a contract where 10% of the credit card sales are collected, the MCA provider may collect $2,500 per week via ACH to equal 10% of the $100,000 it would have collected by splitting the credit card batches.
- Some MCA providers require that you've been in business for at least 24 months. If that's not the case, you'll have seek a company that have a lower requirement. Generally the minimum amount is 12 months, unless you're operating a well known franchise, then the minimum is around six months.
- Know your credit score before you start shopping around. If your business has a lower score, look for providers that fund contracts in your score range. Generally the minimum acceptable score is 550, but some have minimums of 650 or even higher.
- Most important is to find a MCA provider that has been around for at least two years and is financially sound. Many small MCA providers come and go due to lack of capitalization. You want to make sure you find one that will be a true partner in your business. Most business owner renew there cash advances even before the first contract is paid in full. It should be a relatively painless process to get additional funding in 48 to 72 hours the second time around when your balance is paid down (generally the business has to have paid 70% of the balance before being eligible for more funding.)
- Last thing is to research the financing company by checking their Better Business Bureau rating, see if they have a finance lenders license (this is not required, but its nice to know if they are being regulated) and check out discussion boards to see other clients reviews.
American Finance Solutions does not charge any type of fees in association with its contracts, does not require security in any collateral, offers all three collection methods, requires business be operating for 12 months usually (six months for a franchise), minimum FICO score requirement of 550 and has been in operation for three years and is a licensed California lender.
When seeking a merchant cash advance make sure you find the right financing institution to fit your business' needs.
- Make it a priority to seek a merchant cash advance that requires no closing costs.
- Avoid initial, up-front fees including application fees, credit report fees and any other fees. Negotiate or seek a merchant cash advance provider that can wave initial fees.
- You may be asked to provide collateral to obtain a merchant cash advance. If your merchant cash provider requires it then the rate should be dramatically lower because it is now secured financing.
- Some merchant cash advance providers require that the business provide financial statements. Most require them for larger funding amount ($50,000 or more)
- Avoid any minimum payment requirements in the MCA contract. Some contracts require that a minimum amount be collected. The beauty of the MCA is that payback is tied directly to the business' cash flow. So, when the business is doing well, it pays back faster and just the opposite when its slower.
- Find the right collection method for your business. Most MCA providers have the business change their processing over to a credit card processing company that splits the credit card batches. If you can't change credit card processors, some may offer a trust account (also known as a lock box) collection method, where all credit card proceeds are deposited into a separate checking account then the business receives its proceeds via ACH. Some MCA providers may also offer a fixed payment collection where they collect a set amount based on the average credit card sales a business does. For example a business does $100,000 a month in credit card processing and enters into a contract where 10% of the credit card sales are collected, the MCA provider may collect $2,500 per week via ACH to equal 10% of the $100,000 it would have collected by splitting the credit card batches.
- Some MCA providers require that you've been in business for at least 24 months. If that's not the case, you'll have seek a company that have a lower requirement. Generally the minimum amount is 12 months, unless you're operating a well known franchise, then the minimum is around six months.
- Know your credit score before you start shopping around. If your business has a lower score, look for providers that fund contracts in your score range. Generally the minimum acceptable score is 550, but some have minimums of 650 or even higher.
- Most important is to find a MCA provider that has been around for at least two years and is financially sound. Many small MCA providers come and go due to lack of capitalization. You want to make sure you find one that will be a true partner in your business. Most business owner renew there cash advances even before the first contract is paid in full. It should be a relatively painless process to get additional funding in 48 to 72 hours the second time around when your balance is paid down (generally the business has to have paid 70% of the balance before being eligible for more funding.)
- Last thing is to research the financing company by checking their Better Business Bureau rating, see if they have a finance lenders license (this is not required, but its nice to know if they are being regulated) and check out discussion boards to see other clients reviews.
American Finance Solutions does not charge any type of fees in association with its contracts, does not require security in any collateral, offers all three collection methods, requires business be operating for 12 months usually (six months for a franchise), minimum FICO score requirement of 550 and has been in operation for three years and is a licensed California lender.
March 28, 2009
Prix-Fixe Saving Restaurateurs
One of the most predominant businesses to use the merchant cash advance is restaurants. Historically it has been next to impossible for a restaurant to get any type of unsecured financing from a bank or other financial institution. So it is no surprise that they were the early adopters of the MCA product.
If you've been any restaurant, especially high-end ones, you might have been the only patron. With virtually every American feeling the economic crunch the first discretionary spending to cut is eating out. As a MCA provider we have definitely seen our clients sales fall for high- and middle-end restaurants while sales at low-end restaurants increase significantly as the consumer spends much less (its a great time to own a little taco shop or pizza joint.)
There are a few bright spots for our gourmet restaurants and their clients. All of those that are surviving have adopted the fixed price menu. This recent article in Restaurant News shares the success stories from restaurants that are thriving with a prix-fixe menu and actually gaining market share.
If your in the business that offers MCA you probably know that most providers are very hesitant to offer new restaurant a contract when the clients need it most. MCA providers need really look at a potential clients operating history. Agents selling the MCA really need to get to know the client and find out the following:
Have sales remained steady over the past six months? If so, the owner is definitely doing something right and will most likely be around for a long time.
Has the owner changed his operations? For example cut costs or added a breakfast serving to increase sales.
What marketing changes has the owner successfully implemented? Offering the fixed price menu or free delivery in the local area are good examples.
Now the agent can submit the client for financing with not just an application and some statements, but submit a complete package that is much more compelling.
If you've been any restaurant, especially high-end ones, you might have been the only patron. With virtually every American feeling the economic crunch the first discretionary spending to cut is eating out. As a MCA provider we have definitely seen our clients sales fall for high- and middle-end restaurants while sales at low-end restaurants increase significantly as the consumer spends much less (its a great time to own a little taco shop or pizza joint.)
There are a few bright spots for our gourmet restaurants and their clients. All of those that are surviving have adopted the fixed price menu. This recent article in Restaurant News shares the success stories from restaurants that are thriving with a prix-fixe menu and actually gaining market share.
If your in the business that offers MCA you probably know that most providers are very hesitant to offer new restaurant a contract when the clients need it most. MCA providers need really look at a potential clients operating history. Agents selling the MCA really need to get to know the client and find out the following:
Have sales remained steady over the past six months? If so, the owner is definitely doing something right and will most likely be around for a long time.
Has the owner changed his operations? For example cut costs or added a breakfast serving to increase sales.
What marketing changes has the owner successfully implemented? Offering the fixed price menu or free delivery in the local area are good examples.
Now the agent can submit the client for financing with not just an application and some statements, but submit a complete package that is much more compelling.
March 21, 2009
SBA Announces Rescue Plan, Will It Work?
On Monday, the Treasury Department announced the details of a rescue plan to expand the small-business loan market. The details, which you are found here, explain that the Treasury Department is going to spend $15 billion buying securities made up of packaged SBA loans from the 7(a) and 504 programs. The major points of the plan are:
1. Dedicate $15 billion to purchase SBA loans
2. Temporarily raise SBA guarantees to issuing banks to 90% (up from current guarantees of 75% and 85%)
3. Eliminate SBA fees to both the business getting the loan and the issuing bank to lower the overall cost of capital
These are all great steps to loosen credit for small business owners. This will also spur many business owners to seek capital through traditional bank loans. However it does nothing to address the lending guidelines that issuing banks have.
I've received numerous inquiries from agents asking, "How will this affect the financial product I sell?" Many are worried that the new guidelines will result in less businesses to utilize the MCA. What we have seen over the past week is just the opposite.
The announcement has lead to a surge in business searching for capital, whom the majority do not qualify for an SBA loan. This leads many of those to discover the merchant cash advance product for the first time. Even better for those selling our product is that these new customers are much more credit worthy than the previous businesses, resulting in higher approval rates from MCA providers.
Now is a great time to take advantage of this upswing in business. The most successful realize that these new prospects coming into the market are also different than previous clients. Being a new product to them, the clients need to be fully educated about what an merchant cash advance is. Also, these new clients tend to be more experienced and more educated. They do more research and take their time making financial decisions. An agent who takes a more consultative sales approach focusing on customer service will not only be more successful, but will also land a client for years to come and generate multiple referrals.
1. Dedicate $15 billion to purchase SBA loans
2. Temporarily raise SBA guarantees to issuing banks to 90% (up from current guarantees of 75% and 85%)
3. Eliminate SBA fees to both the business getting the loan and the issuing bank to lower the overall cost of capital
These are all great steps to loosen credit for small business owners. This will also spur many business owners to seek capital through traditional bank loans. However it does nothing to address the lending guidelines that issuing banks have.
I've received numerous inquiries from agents asking, "How will this affect the financial product I sell?" Many are worried that the new guidelines will result in less businesses to utilize the MCA. What we have seen over the past week is just the opposite.
The announcement has lead to a surge in business searching for capital, whom the majority do not qualify for an SBA loan. This leads many of those to discover the merchant cash advance product for the first time. Even better for those selling our product is that these new customers are much more credit worthy than the previous businesses, resulting in higher approval rates from MCA providers.
Now is a great time to take advantage of this upswing in business. The most successful realize that these new prospects coming into the market are also different than previous clients. Being a new product to them, the clients need to be fully educated about what an merchant cash advance is. Also, these new clients tend to be more experienced and more educated. They do more research and take their time making financial decisions. An agent who takes a more consultative sales approach focusing on customer service will not only be more successful, but will also land a client for years to come and generate multiple referrals.
March 14, 2009
Traditional Financing Gone For Small Businesses
If you own a small business and have been in the bank lately there are only two letters that you've heard. They are N and O! This recent article in Newsweek highlights the challenges that small- and medium-sized business are have in obtaining financing.
The example is a 46-year old plastic bagmanufacturing company that had solid relationship with his bank. With a company this established and marketing a core product one would think that they are a sure in for bank financing. Now imagine being a successful business that has been around for a couple of years.
Their are other options out there depending on your industry and product or service you sell. For companies that sell B-to-B a good route might be traditional factoring of their account receivables or spot factoring of just a few invoices. A manufacturer may be able to do an equipment lease back or certain piece of equipment or vehicles. Of course many service, wholesaler and retailers may be able to take advantage of the merchant cash advance.
For each of the above there are different fees and costs. All provide a low documentation, convenient alternative to bank financing. Of course the rate charged for each is higher than what you used to be able to get at your bank. Expect to pay two to four times the yield rate that the bank offers. So while access to capital is going to cost your business more than the past, its still out there for when you need it.
The example is a 46-year old plastic bagmanufacturing company that had solid relationship with his bank. With a company this established and marketing a core product one would think that they are a sure in for bank financing. Now imagine being a successful business that has been around for a couple of years.
Their are other options out there depending on your industry and product or service you sell. For companies that sell B-to-B a good route might be traditional factoring of their account receivables or spot factoring of just a few invoices. A manufacturer may be able to do an equipment lease back or certain piece of equipment or vehicles. Of course many service, wholesaler and retailers may be able to take advantage of the merchant cash advance.
For each of the above there are different fees and costs. All provide a low documentation, convenient alternative to bank financing. Of course the rate charged for each is higher than what you used to be able to get at your bank. Expect to pay two to four times the yield rate that the bank offers. So while access to capital is going to cost your business more than the past, its still out there for when you need it.
March 8, 2009
Responsible Use Of The Merchant Cash Advance
At our offices we get calls from business owners everyday asking about how a Merchant Cash Advance works. Nearly all are looking for traditional financing that their current bank or finance partner will not provide. Many of our clients recently had a traditional line of credit from their bank that has been pulled, despite never missing a payment and being a good client of the bank for years.
After explaining that an MCA is not a loan (but actually a sales contract) we get asked what is the rate? The MCA provider is purchasing future revenue at a discount (for example we might purchase $26,000 of future receivables for $20,000 today resulting in a $6,000 discount). Most MCA providers will set the credit card retrieval rate to collect the $26,000 over six or seven months. Doing the math you quickly see that paying $6,000 for access to $20,000 of capital is expensive and approximately triple the rate when compared to traditional bank financing.
The next question always out of the caller is "Why so high?" Answer: A MCA provides a quick, low-doc, uncollateraized business financing when most if not all other financing institutions will not. This high-risk financing carries much high default ratios than typical bank financing and for the MCA provider to stay in business they must make up for these losses in their pricing.
Most business owners love the thought of quickly accessing $10,000 to $150,000 of cash to grow their business. When entering into an MCA contract the client needs to answer two important questions:
1. By utilizing the MCA will I be able to make more profit in the long-run than the cost of the funds?
2. Can my cash flow afford the withholding percentage on my credit card receipts?
If the answer to either of these is no then the client needs to seriously consider the viability of an MCA for their financing needs. Reputable MCA providers are not in business to just hand out cash and make their premium. Rather they are here as an alternative financing partner to help business owners grow or deal with a situation or opportunity while not putting a financial hardship on the business.
After explaining that an MCA is not a loan (but actually a sales contract) we get asked what is the rate? The MCA provider is purchasing future revenue at a discount (for example we might purchase $26,000 of future receivables for $20,000 today resulting in a $6,000 discount). Most MCA providers will set the credit card retrieval rate to collect the $26,000 over six or seven months. Doing the math you quickly see that paying $6,000 for access to $20,000 of capital is expensive and approximately triple the rate when compared to traditional bank financing.
The next question always out of the caller is "Why so high?" Answer: A MCA provides a quick, low-doc, uncollateraized business financing when most if not all other financing institutions will not. This high-risk financing carries much high default ratios than typical bank financing and for the MCA provider to stay in business they must make up for these losses in their pricing.
Most business owners love the thought of quickly accessing $10,000 to $150,000 of cash to grow their business. When entering into an MCA contract the client needs to answer two important questions:
1. By utilizing the MCA will I be able to make more profit in the long-run than the cost of the funds?
2. Can my cash flow afford the withholding percentage on my credit card receipts?
If the answer to either of these is no then the client needs to seriously consider the viability of an MCA for their financing needs. Reputable MCA providers are not in business to just hand out cash and make their premium. Rather they are here as an alternative financing partner to help business owners grow or deal with a situation or opportunity while not putting a financial hardship on the business.
March 7, 2009
Welcome To Merchant Cash Advances Blog
Hello all and welcome to the Merchant Cash Advances blog. This blog is dedicated to providing information and ongoing updates to the Merchant Cash Advance industry for both clients and sales agents (resellers) of the industry. We welcome all input and encourage communication from all to promote the industry and fairly represent the financial service that we offer.
The Merchant Cash Advance (aka MCA) has become increasingly popular over the past four years as a viable finance option for many small- and medium-sized businesses. While the industry as been around for over a decade the economic downturn and credit crisis that started in 2007 has resulted in tremendous growth. This tremendous growth brought numerous new MCA providers and thousands of resellers into the marketplace.
As the United States economy continued its collapse throughout 2008, the MCA providers who made poor decisions on which clients to finance paid the price with dramatically increase defaults. The resulting shakeout in the industry has left a core group of MCA providers, including American Finance Solutions.
To give an overview, a merchant cash advance is NOT a loan, but a factoring product where a business sells a portion of its future credit card receivables for cash today. The MCA provider offers an alternative financing option to provide working capital to small- and medium-sized businesses that do not qualify for under traditional financing. To summarize, a Merchant Cash Advance provides fast, low-documentation funding that is uncollateralized for businesses. The premium of this service is more expensive than traditional financing given the risk associated with financing.
Our industry has seen various website and blogs that come and go on the industry over the years. As the CEO of a mid-tier MCA provider who has been around for the past three years as a hand-on manager my goal is to provide unbiased information about industry. As this blog evolves it should will become the prominent resource for the industry for all to comment, educate and gain information on product and those who benefit from it.
Please email me with any questions, comments, etc. about this blog and the merchant cash advance industry. I look forward to developing this resource with your input sent to me at scott@americanfinancesolutions.com.
The Merchant Cash Advance (aka MCA) has become increasingly popular over the past four years as a viable finance option for many small- and medium-sized businesses. While the industry as been around for over a decade the economic downturn and credit crisis that started in 2007 has resulted in tremendous growth. This tremendous growth brought numerous new MCA providers and thousands of resellers into the marketplace.
As the United States economy continued its collapse throughout 2008, the MCA providers who made poor decisions on which clients to finance paid the price with dramatically increase defaults. The resulting shakeout in the industry has left a core group of MCA providers, including American Finance Solutions.
To give an overview, a merchant cash advance is NOT a loan, but a factoring product where a business sells a portion of its future credit card receivables for cash today. The MCA provider offers an alternative financing option to provide working capital to small- and medium-sized businesses that do not qualify for under traditional financing. To summarize, a Merchant Cash Advance provides fast, low-documentation funding that is uncollateralized for businesses. The premium of this service is more expensive than traditional financing given the risk associated with financing.
Our industry has seen various website and blogs that come and go on the industry over the years. As the CEO of a mid-tier MCA provider who has been around for the past three years as a hand-on manager my goal is to provide unbiased information about industry. As this blog evolves it should will become the prominent resource for the industry for all to comment, educate and gain information on product and those who benefit from it.
Please email me with any questions, comments, etc. about this blog and the merchant cash advance industry. I look forward to developing this resource with your input sent to me at scott@americanfinancesolutions.com.
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