...banks have cut credit lines...because the merchant's credit has dropped 200 points in the last month, and they have stopped paying creditors, taxes, and their mortgages. Many of these businesses still get funded by the merchant cash advance industry
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New York, NY (PRWEB) May 6, 2010
Small business owners bear the brunt of declining consumerism and restricted lending by banks. As a result, American merchants are left with little choice and increasing debt. In comes a service called merchantcashadvances.org which connects small business owners with a different kind of lender, and provides free information on unsecured (no collateral) advances through credit card sales for all those merchants left high and dry by the banks. But some have called this growing merchant cash advance sector predatory because of the industry's high interest rates when compared to bank loans.
In a merchant cash advance, a lender will "advance" a lump sum of money for a fixed cost to a business owner. The lender collects his money by automatically taking a percentage of the merchant's Visa/MasterCard sales until the advance is paid back. The fixed cost, or “interest,” seems to be the sticking point for many critics.
So is it an expensive but possibly helpful loan operation? Or is it an exploitative industry, sucking what life is left from merchants that the banks have already abandoned?
"It’s expensive money," as one funding specialist says regularly to his clients, "there is no doubt about that. But nobody is lending at 6% anymore, and certainly not to restricted industries like restaurants, auto-repair, and retail stores – all businesses which are notorious for failing within the first year. The funding process is very quick, and usually takes between 4 - 7 business days. " US State usury laws do not apply to this industry because merchant cash advances are not legal loans but purchase and sales agreements – i.e. the merchant agrees to sell their future credit card receivables at a discounted rate.
Many small business owners do not qualify for a bank loan because of their personal credit history. Still others struggle to find business financing as a result of their industry's perceived undesirability as a credit risk due to its high failure rates. A third difficulty is often tied to the second: in business, it pays to be old. Banks are less likely to take a risk on a young business when statistics show that most businesses fail within the first one to five years.
Banks have not exactly been friends to the little guys - despite the fact that small businesses employ over 50% of American workers. They have failed to extend a line of credit to these businesses in difficult economic times. Some bank loans have personal assets as collateral tied to them, and so if the business goes under, then the personal assets go as well. Additionally, many sub-prime small business owners are suffering from the variable rate mortgage crisis. Bank underwriting has continued to be stringent, even with the influx of billions of dollars of TARP money to small local banks earmarked for small business loans. Furthermore, banks often demand a fair amount of collateral to secure a loan.
In contrast, in a merchant cash advance, if the business fails, then the merchant cash advance lender loses his investment. Logically, the merchant cash advance company has a vested interest in actually helping the business owner, as the lender is only paid back if the merchant actually continues to run his business. Unsecured lending is risky, and thus justifiably pricey.
"I speak with many small business owners. Many complain that their banks have cut their credit lines despite their long standing relationship," says a funding specialist. "And then I can understand why, and it's because the merchant's credit has dropped 200 points in the last month, and they have stopped paying creditors, taxes, and their mortgages. Many of these businesses still get funded by the merchant cash advance industry. It is simply too risky for banks to touch."
As in all things financial, business owners have to be aware of what they are getting into. Merchant cash advances will make sense for some businesses and make no sense for others. It won't fix a failing business with major cash flow issues, but it can give successful businesses an opportunity to expand, and those who are struggling a bit, the crutch they need to make it through. Ultimately, the lesson is to do your homework. Find the right loan to suit the individual business's future. Merchantcashadvances.org offers unique insight from inside the merchant cash advance industry that helps shed light on the controversial process.