Credit Card Factoring Quick Holiday Season Inventory Capital for Retailers

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The holiday season is almost here and many retailers find themselves low on cash to purchase needed inventory. Since the holiday season can be as much as 40% of a merchants yearly sales, this can pose a major financial problem. An exceptional solution to this potential problem is a credit card factoring advance.

The holiday season is almost here and many retailers find themselves low on cash to purchase needed inventory. Since the holiday season can be as much as 40% of a merchant's yearly sales, this can pose a major financial problem. An exceptional solution to this potential problem is a credit card factoring advance.

"This product is very unique," said Daniel Ollman, President of Crown Financial Services, Inc. "It's a purchase of an asset, not a loan, so we have to use specific language consistent with a purchase of an asset, like retrieval rate and discount rate instead of interest rate. A lot like traditional factoring but it's of a sale that hasn't yet happened."

A credit card factoring advance provider gives merchants a lump sum of cash now. In exchange, merchants agree to pay back the principal and fee, by giving the company an agreed percentage of their credit card sales until their balance is zero. This percentage is usually between 12%-24%. The payback time-frame is only 5-12 months.

Merchants generally must use the providers' credit card processor because the advance is paid back automatically as a percentage of each batch's proceeds. A small number of credit card factoring advance companies do not require the merchant to change credit card processors. So if this would be a problem, make sure to ask the credit card factoring company you are thinking about working with.

"A credit card factoring advance is very different from traditional funding programs," said Daniel Ollman, President of Crown Financial Services, Inc. "In essence, we purchase a small percentage of future MasterCard and Visa revenues, and the merchant repays this as a daily percentage of those revenues."

Getting cash from banks can be difficult for some businesses, particularly retail, restaurant, franchisees or seasonal businesses. These merchants most heavily use credit card processing, so a credit card factoring advance program offers a number of benefits.

Merchants Like It
"The cash is usually available more quickly 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". Most cash advance providers advertise that the cash can be available in about 7-10 days.

How Providers Make Money
According to Ollman, financing charges can vary widely, not just from one provider to another, but from one advance to another. The finance charge is determined by underwriting which takes into consideration the industry type, amount of advance and the length of time to repay the advance as well as other factors. "As an example, the range of financing on a $10,000 advance could be as low as $2,000 or as high as $4,000. That's a 50% difference," he said.

"The merchants interested in a program like this may have a hazy or troubled credit history. They'll have things like past tax issues, delinquencies, collection matters, liens or judgments that would be an automatic red flag for a conventional bank." The credit card factoring industry caters to businesses that can't get traditional funding.

"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, credit card factoring 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 banks. "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. Often a credit card factoring advance is the only quick way to receive needed capital.

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