The collapse of the credit markets has taken a significant toll on small businesses. SBA lending is down considerably, and business owners have been forced to make severe cuts due to credit, financing and cash-flow issues. As a result, the merchant cash advance industry that serves the needs of businesses which are turned away by banks and credit cards has seen a dramatic boom, as creditworthy businesses that have enjoyed ready access to working capital in the past are now taking advantage of these business cash advances.
Business cash advance providers have issued millions of dollars to small businesses, which agree to remit a small percentage of their future credit card sales to the provider until their advance is paid in full. In the current economic climate, many of the small and mid-size businesses that have turned to business cash advances have not had any other financial recourse, and the cash advances have often proved to be a vital lifeline for businesses that encounter an unexpected financial burden. In addition, the collection method using automatic deductions at a fixed percentage from merchants’ credit card receivables makes cash advances convenient for businesses. And, because the total amount of money that the merchants pay for their business cash advance remains fixed regardless of how long it takes to remit the balance in full, the cash advance providers assume all of the risks associated with the possibility of a prolonged payment period due to a decline in sales.
With the growth of merchant cash advances, it has become important for business owners to take note of the differences between these offers from the various providers, as there are some important red flags to avoid. Business owners who take the time to shop and compare offers will notice that they are not all alike, and some include provisions that can be very costly and detrimental. The most reputable providers are already adhering to business practices and principles that are endorsed by the industry association, but there are some small providers who are exploiting the current desperate economic climate by using terms and conditions that are unfair to the businesses which accept their funds.
These are the key issues and red flags for businesses to avoid in merchant cash advances:
” Upfront application fees – A fee simply for applying for consideration for approval for a merchant cash advance is never a legitimate offer. Companies could simply collect such fees and never provide any funds. A small one-time closing fee upon the acceptance of the cash advance by the merchant is a standard and acceptable practice, but a fee simply for applying for the offer is unfair and inappropriate.
” Fluctuations in the repayment percentage applied on the credit card receivables – The percentage of funds that is automatically remitted from the merchant’s credit card sales to the merchant cash advance provider must always remain fixed, regardless of how long it takes for a merchant to pay off their complete balance based on their fluctuating sales volume. One of the key benefits of these offers for businesses is that they do not pay more for the funds if it takes them longer to remit their balance in full due to a decline in sales.
” Balloon dates – There should not be a fixed due date when the complete remaining balance becomes immediately due if the merchant takes longer than expected due to a drop in sales. The repayment terms for business cash advances should be based solely on the remittance of a fixed percentage from a business’s credit card sales until the balance is paid in full, without a specific payment term period or due date. It is incumbent on the provider to conduct all of the necessary underwriting and due diligence to accommodate for the risks associated with the possibility of a prolonged payment period due to a decline in sales.
” Requirements to automatically switch to a specific credit card processor – The most reputable merchant cash advance providers do not require businesses to switch to using their exclusive credit card processor partner in order to qualify for a cash advance. If the provider is not able to work with the processor that a business is currently using, the merchant should be offered a choice of a number of leading credit card processors that are acceptable for use with the provider’s program.
The future for business cash advances continues to look very bright, as many banking experts predict that commercial loans and lines of credit for small and mid-size businesses will continue to be difficult to secure for the foreseeable future. For companies that encounter an unexpected need for immediate funds and have limited options, business cash advances will continue to offer an important lifeline to help businesses get past all of the challenges and hurdles that they encounter. By comparison shopping and avoiding the red flags from the offers of unscrupulous providers, merchants will be able to feel secure in their ability to turn to business cash advances for financial help whenever the need arises.