Thursday, August 16, 2012

Cash Advances for Merchants

"Merchant Services" are generally understood to center around the processing of payment data from bank cards or gift cards and the like. There is another aspect to these services, however, that some businesses benefit from in ways that can quickly help them expand, cover shortfalls or otherwise access needed resources without having to go through a lengthy process or get tied into bank loans or mortgages.

By getting a cash advance from their processing company, merchants are able to put funds directly into their bank account and have the balance automatically paid off over a short period of time simply by automatically deducting a percentage of the credit card sales made by the merchant's customers (or, to look at it another way, to pay a higher percentage on sales to cover the repayment of the advance).

An advance program can be used to purchase additional inventory, do necessary repairs or upgrades, or simply pay some bills. Funds can be delivered usually within 5-10 business days. Sometimes even in as little as 72 hours.

This is good for merchants who need the money quickly, those with little collateral or if they have limited access to other areas to get the funds. 

In order to get access to this type of funding, a merchant will generally have to work with a sales agent from the processing company they use. These cash advance programs are great for sales agents, because they generally will share in the profits made on interest, get a nice upfront bonus from the processing company, or both.

Here is an example of how this works, based on a $20,000 cash advance:

A merchant may be funded with a factor rate of 1.41, which means the merchant would have to pay back $28,200. It would be estimated that the merchant would take about eight months to pay this amount back.

In this case, the sales agent might make an upfront bonus of over $1500, somewhere in the range of 5-6%. Potentially, the agent would then also see monthly residual payments on the interest, totaling between $500 and $600 by the time eight months have passed, putting over $2000 in the sales agent's pocket.

It seems like a win-win for the merchant and the sales agent, under the right conditions. It is certainly a great deal for the sales agent, considering that the paperwork is fairly minimal and mostly just entails filling out a simple application and faxing copies of bank statements and processing statements to the appropriate office. The merchant does not usually have to spend much time on the application, either; the hardest part is often gathering three to six months worth of statements for the processing account and for the business checking account associated with it. Otherwise, it is not much different than filling out the original agreement with the processing company.

There are times when a cash advance will be declined.

Most commonly, businesses with bankruptcies or foreclosures are going to be denied. If the business owner has these on his or her personal record, it might cause the application to be rejected. Just like any other fiscal arrangement, there must be a personal guarantor involved, and this is usually the business owner. If a merchant does have one of these issues, it is best to talk about it first, before trying to go through the process; sometimes there may be a way to work around a foreclosure or bankruptcy, and working with the company that provides the cash advance to find out the best way to approach it before going through the process will help mitigate any issues that could arise during the application period.

When is a cash advance right for a merchant?

The cost may seem a little high for the value of the loan. At 41%, doesn't that seem a bit like highway robbery? What a merchant is paying for here is quick access, possibly emergency access, and the ability to pay it back without fear of incurring an unmanageable debt. It is good for credit-building and particularly useful for access to funds that would be denied by a bank or credit union because of nothing to back up the loan; i.e, the merchant does not own property that can be mortgaged or otherwise has too many outstanding loans. 

While I do not actively "sell" this sort of loan (and always council clients to check with their lending institution first), it is something that I am occasionally questioned about. The process of setting up an advance is simple enough that some merchants merely want to find out how much they can access, often around tax time, with the knowledge that at least the cost of the interest is going to be a tax advantage for the coming fiscal year. In that respect, with the help of a good accountant, merchants may even find that the ensuing business loss is much to their benefit on top of the cash infusion that was received. Without the input of an accountant, however, it is essential that business owners do not leap into the offer of "free money" that some sales agents promise. At the high interest rate, even with the quick payback that is established, this type of funding is not for every merchant. As always, do your due diligence. Know the terms of your deal. And work with an honest sales agent who will disclose everything to upfront.

Now, you just need someplace to put that extra money...

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