Las Vegas, NV (PRWEB) August 27, 2007
The merchant cash advance industry is growing at an astonishing clip. This growth is because traditional banks are not meeting the needs of small businesses. Crown Financial Services, Inc. has released a new merchant cash advance program that utilizes an old idea, merchant cash advances paid back based on future credit card sales, with a new twist. The new twist is the advance is based on the merchants total sales volume, not just their Visa/MasterCard sales volume like most programs. This allows the merchant access to a greater amount of cash.
"This product is unique," said Daniel Ollman, President of Crown Financial Services, Inc. "It's a purchase of an asset, not a loan". A cash advance provider gives merchants a lump sum cash advance up front. In exchange, merchants agree to pay back the advance, by giving the company an agreed percentage of their credit card sales until their balance is zero. This percentage is between 12%-24%. The payback time-frame is only 5-12 months.
Getting cash from traditional financing institutions can be difficult for some businesses, particularly retail, restaurant, franchisees or seasonal businesses. These merchants most heavily use credit card processing, so merchant cash advance programs offer a number of benefits.
"The cash is usually available quicker than it is with traditional loans said Ollman. These programs appeal especially to retail and restaurant merchants not only because these types of businesses can rarely get traditional funding, but also because of the immediate liquidity".
Unlike a loan with a fixed rate of interest, amount due and set due date each month, with merchant cash advances the money is paid back as credit card receivables come in. "We work with the business, so it is cash flow friendly, especially during seasonally slow periods," Ollman said. "Traditional loans require a set payment every month, whether the business has made a sale or not."
"Because payments are calculated as a percentage of sales, if sales are growing, the amortization could be quicker," said Ollman, but if the proprietor experiences some interruption or downturn in business, the payments will be lower." In most cases, business owners put up no personal collateral and make no personal guarantee.
If the merchant's business is doing well and sales are up, the advance provider collects the money sooner. If sales are sluggish, the payback takes longer. Since there is no time limit on paying back the loan, the effective annual rate decreases as the payments are extended over time, although the cash provider typically forecasts a fairly short period for payback, usually less than a year.
"There's no question that the merchant's cost for this kind of financing is going to come in more than a conventional loan," Ollman said. "But it's pretty much a foregone conclusion that a conventional bank will reject this merchant for their much needed loan.
"The merchants interested in a program like this may have a distressed credit history. They'll have things like past tax issues, a list of delinquencies, collection matters, liens or judgments that would be an automatic red flag for a conventional bank." The merchant cash advance industry caters to businesses that can't get traditional funding.
There is a risk to cash advance providers (hence the higher cost to the merchant for the money), but they use sophisticated models to determine the future likely credit card purchases. They also offer the cash with relatively short payback periods to help mitigate risk.
"The provider of the cash advance takes all of the risk," Ollman said. "The risk is high, but since it is paid out of projected future sales, it is typically a risk worth taking."
Seasonal businesses that need cash to carry them through lean seasons or merchants who have an unexpected downturn in business (say because of road construction, building repairs or extended illness) might find a need for a cash advance until business picks up again. However, merchant cash advance companies say that ailing businesses are not the only merchants interested in this kind of program.
Many types of businesses are often underserved by traditional funding institutions. "Take for example a restaurant," Ollman said. "It could be a very successful business, but a traditional bank wants to see tangible assets. Perishable foods or used restaurant equipment just won't make the cut, even if that restaurant is packed every night."
There are many examples of times when owners of healthy small businesses could use cash to help build their businesses but can't get the traditional funding necessary. These include franchisees who have exhausted their savings to purchase their first franchise and want to open a second one; merchants whose competitors have closed and have the chance to buy their competitor's old inventory or move into a new location; expansions; buyouts; or simply the desire to move quickly on a perceived new opportunity.