Merchant Loans and Cash Advances
During a speech at the George Washington University Federal Reserve Bank, Chairman George Bernanke stated that “small businesses have had a hard time getting credit.” [Now, if banks make money by giving loans, what is the cause? Possibly, Bernanke, to a small degree?] According to FDIC statistics, lending has been drastically reduced.
The business under $1 million loans fell 13% between June 2007 and June 2011. In addition, the amount lent has decreased 19%.
In compliance with Federal Reserve incentives, bank lending standards have increased. Therefore, fewer businesses may qualify for loans.
By raising their credit standards for risky home loans, banks have relegated commercial loans as collateral damage in an effort to improve lending practices. This, ultimately, is a scar left by the financial crisis.
Small business loans and home loans are inextricably linked, as many small businesses use home equity to finance their businesses. Obviously, forcing the Fed to relax would force us back into the escalating crisis we just emerged from. So the dilemma is where do we find funding for America’s small businesses.
For suggestions, I emailed my blog commenters, responders, and subscribers for answers. The responses were almost choral; because they all had the same answer Merchant Cash Advance.
Small business owners who need cash injections into their businesses are turning more often to this 10-year-old industry. Cash providers, who typically charge premiums of 30% or more, are trying to promote a universal standard to avoid regulatory restrictions.
Businesses receive cash advances from vendors [Note: I did not say lenders!] in exchange for future sales on credit. The caveat though is that (because these businesses may have little to no credit) the businesses are charged interest rates (typically) ranging from 60% to 200% APR. Again, these transactions are not considered loans. They are, however, considered as a purchase of future income. Therefore, they are not regulated and can collect from the daily revenue of credit card processing. Also, because some businesses are seasonal, payments are reduced during the slower months.
According to Marc Abbey, managing partner at consulting firm First Annapolis, there has only been 10% penetration of this $5 billion dollar industry. Businesses responsible for cash advances make a conscious decision not to charge too much too soon, so that client businesses can survive.
As mentioned above, this is a newer industry, only 10 years old. Even now, lines are being drawn in the form of legal battles in commercially forward-thinking states like California. By requiring cash advance companies to obtain state licenses, business capital advance companies now have expanded parameters for collection and timing.
Through the latest innovation and expansion, MCAs can now provide cash advances in the form of loans, lines of credit, credit card financing, and support leases. You can also supplement bank financing.
With regard to sellers and independent sales offices, be very careful. Before entering this field, it is prudent to be well informed about the industry. I suggest you refer to the Electronic Transactions Association. You can find a detailed white paper on the basics of Merchant Cash Advance there.