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Cash advance providers ride to the credit rescue: when banks are unwilling or unable to provide the funding that small to mid-sized business owners need, cash advances can provide a lifeline by providing capital against future credit card receivables.

Access to working capital can mean the difference between "make it or break it" for many small and mid-sized businesses.

In an ideal situation, a business will generate enough revenue from sales to cover the cost of day-to-day operations, essential purchases, renovations and improvements. But when major unexpected expenses crop up or--as we're seeing today--the economy grinds to a screeching halt, owners can find themselves struggling to get their hands on the working capital they need to keep their businesses afloat.

Traditional bank loans may be a good option for some business owners under such circumstances, but banks aren't willing to finance everyone who seeks their help. Business owners who are considered "high-risk" borrowers, often due to less than perfect credit scores or insufficient collateral, are likely to face considerable difficulty obtaining a bank loan. And the credit crunch has made lending standards even higher.

Even some with sparkling credit history can be denied if the loan amount they request is too low. As the old adage goes, "Banks lend you money that you already have."

As business owners cope with the flagging economy, others may be turned off by the lengthy and complex application process required for many traditional loans. Those in urgent need of funding may not have the time or the patience needed to provide the bank with copies of business plans, tax returns and financial statements. Time can be of the essence for business owners with an immediate need for working capital.

So, where can cash-strapped business owners turn? With increasing frequency, business cash advance providers are becoming an answer. Although cash advance services have been around for many years, their popularity with small and mid-sized businesses has grown in recent years as information has spread and proprietors have become more informed about this relatively simple financing option.

A Kind of Sales Transaction

Many business owners and financial advisors are very familiar with the regular sale of financial assets, including mortgages, automobile contracts and accounts receivable, among others; a business cash advance is just another example of such a sales transaction.

It's important to understand the differences between a business cash advance and a loan. Rather than lending money to business owners, cash advance providers buy a fixed share of a business' future credit card transactions. And unlike traditional loans, business owners are not personally liable for repayment, except in the event of fraud or a breach of contract.

Because ease of use and accessibility are meant to be the driving features of business cash advances, there are no lien or collateral requirements, no business-use restrictions and, generally speaking, no set payback period or minimum payment amount. Moreover, rather than be subjected to a multi-month, cumbersome bank underwriting process, an underwriting decision is often reached within 48 hours and, if approved, funding will occur with 7-10 business days thereafter.

The payback process is also quite simple and requires no guesswork or paper tracking. Every time a sales transaction is made with a credit card, the payment percentage is automatically transferred to the cash advance provider, and repayment ceases once the contract obligation has been satisfied.

Repayment Tracks Revenue Trend

Because the cash advance provider is only paid when a sale is made, repayment tracks the revenue trend of the merchant's business. In industries whose success fluctuates with the market, this is one of the most appealing aspects of the cash advance.

Not only does it promote healthy cash flow within the business, but it ensures that payments are not a burden during periods of slow growth or sluggish sales. With consumer spending plummeting in recent months, this feature is particularly helpful for business owners in today's market.

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Considering that questionable lending practices helped spur the current economic crisis, a healthy skepticism about non-traditional financing methods has surfaced. It should be noted that business cash providers do not charge interest on the money they provide.

Borrowers are responsible for repaying a predetermined fixed amount, meaning they never have to deal with adjustable rates or compounding interest. Furthermore, hidden costs or fees are not part of business cash advances and, with the exception of fraud, customers are not personally liable for repaying the amount of the advance in the event of a business failure.

Offering cash advances without requiring personal guarantees, liens or collateral is one of the greatest features of this service, because it offers wide and convenient access to small business owners--many of whom would not be able to obtain the financing otherwise.

Because the money they offer is completely unsecured, however, cash advance providers must view each advance as an investment in the success of the business owner, and take care to invest in businesses that have a strong likelihood of continued success.

Business cash advances exist to assist small to mid-sized business owners. They cannot cure all business ills, and they do not promise free money. What they do offer is wide and convenient access to the money that business owners need, whether they are looking to purchase additional seasonal inventory, pay off bills or loans, cover unexpected costs and emergencies or make much-needed improvements to their businesses.

LEE J. JUNDANIAN is Chairman and CEO of RapidAdvance (www.rapidadvance.com), which provides merchant cash advances to spur working capital for growth and expansion. He is the founder of several successful finance companies, including Stone Street Capital and Stone Street Financial.

RELATED ARTICLE: TAKE AWAYS

* When major unexpected expenses crop up or--as we're seeing today--the economy grinds to a screeching halt, owners can find themselves struggling to get their hands on the working capital they need to keep their businesses afloat.

* Businesses without unblemished credit records are having a hard time finding banks willing to lend to them, and business owners may be turned off by the lengthy bank credit process as sales continue to contract.

* Merchant cash advances are not loans but money advanced to a business against future credit card receivables. This is done without personal guarantees or collateral, but because the money is unsecured, providers will look to helping healthy businesses that will pay them back.
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Title Annotation:WORKING CAPITAL
Author:Jundanian, Lee J.
Publication:Financial Executive
Geographic Code:1USA
Date:May 1, 2008
Words:1016
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