Many business owners are struggling to find working capital. Once readily accessible to most businesses, small business loans are harder and harder to come by. Thankfully, business cash advance providers have stepped up to fill the gap. Some business owners are skeptical, and hesitant to be open to the idea, but there are many benefits to the business cash advance program. While they both certainly have strengths and weaknesses, in this article, we hope to clearly explain how they work and what their benefits can be over traditional small business loans.
Business cash advances are very easy to qualify for. Since they’re based on revenue from credit card processing, the biggest qualifying factor is whether or not you accept credit cards as a form of payment, and how often you have sales to run. This makes most retail businesses and certain service-based businesses excellent candidates because they usually accept credit cards and the cardholders are physically present at the point of sale. Unfortunately, most home-based and internet-based businesses don’t qualify. You have to process at least $5,000 per month in credit card sales, and underwriting also likes to see that you settle transactions at least 10 – 12 times every month. Personal credit is not a big factor; the only stipulation ist that the owner’s FICO score is above 500 and there are no open bankruptcies.
The application process is very simple. A one page application is filled out and signed by the business owner. The application contains basic administrative data about the business and the owner(s) and usually also lists a few trade references. The signature authorizes the cash advance provider to obtain a copies of the applicant’s business and personal credit reports. Pre-approvals can be given within 24 hours of the application being submitted along with the business’s 4 most recent credit card processing statements. At lease one, if not all, of the statements must be complete (i.e. all pages submitted) so underwriting can review them completely, looking at credit card processing activity, transaction count, average ticket size, batch frequency and rate analysis. The pre-approval will consist of a few different funding options based on the statements you submitted, along with a list of additional paperwork you’ll need to submit prior to approval. This can vary slightly on a case by case basis, but here’s a complete list of paperwork that’s generally required:
Signed, completed application.
4 most recent credit card processing statements. Seasonal businesses may have to submit more so underwriting can fully understand your seasonality.
3 most recent business bank statements. This should be the account where your credit card deposits go. If that account sweeps to another operating account, those statements may also be required.
Business lease. Underwriting will need the pages listing the parties to the lease, the term and expiration date, the property address and the signatures.
Proof of ownership. This can be a business licence or articles of organization.
Driver’s license or other state issued identification card.
Deals over a certain size may require year-to-date financial statements or the most recent tax returns.
Three Different Programs
Besides the main business cash advance program, there are two additional programs available:
The Starter Program – The starter program is designed for those individuals and businesses who don’t qualify for the traditional program. The two most common reasons someone would be declined for the traditional program is because of poor personal credit or because they process less than $5,000 per month. For the starter program, underwriting still requires that there are no open bankruptcies and that you settle transactions at least 10 – 12 times per month.
The Gold or Platinum Programs – For a long time, individuals and businesses with stellar credit and healthy financials have turned down cash advance offers. The cost of the traditional program was too great for many of them, and there was little that could be done. Providers have developed Gold and Platinum programs for these kinds of businesses. The cost can be less than half compared to the traditional program, and they are often underwritten at 12 – 18 month deals, which is typically a longer term than the traditional program.
Between these two relatively recent developments in the industry, business cash advance providers have been able to boast approval ratings upwards of 90%, and at the same time gain market share among established, credit worthy businesses who normally would only consider traditional small business loans.
Business cash advances, admittedly, are most costly than traditional business loans. The main difference is that business loans accrue interest over time. The longer you take to pay them off, the more expensive they become. Business cash advances have a fixed cost. The transaction that takes place is actually the purchase and sale of your business’s future credit card receivables. The business cash advance provider decides how much of your future receivables they are interested in purchasing (the “purchased amount” or total payback amount), and offer to purchase them at a discount rate, usually somewhere between 15% and 30%. How much they offer to purchase them for is called the “purchase price”. It’s also known as the “advance amount”. At a 15% discount rate, a cash advance could purchase $10,000 by advancing you $8,500. No matter how long you take to pay it back, it will never cost you more than $10,000. The discount rate offered depends on a number of things, including time in business, credit score, process history, etc.
Since the transaction involved in a business cash advance is the purchase of future credit card receivables, they are paid back as you process credit cards. A small percentage of each credit card transaction gets paid to the cash advance provider to pay down the advance. This percentage is fixed, so it remains the same through the course of the advance, and it’s agreed upon prior to funding. The result is an extremely flexible payback schedule. If you have a bad month, you might struggle to make the payment on your traditional business loan, but with a business cash advance, you’ll just end up paying back less that month. You never have to worry about missing a payment, and the cash advance provider only gets paid when you get paid. Most business owners find comfort in this method of payback.
Events of Default
Defaulting on a business loan is serious, since most of them are secured or personally guaranteed. If you miss that monthly payment, the bank can put you in a tricky situation. If you put up any collateral, the bank has the right to take that asset and liquidate it, below market value if they have to, in order to reimburse themselves for the principal outstanding. If you signed personally for the loan, don’t count on “limited liability” to protect yourself. The bank will have the right to take any of your personal assets including your home or your car.
For most business owners, this is the true beauty of the business cash advance. The fact that they are unsecured and never personally guaranteed justifies the higher cost. If you find yourself in the position where you can’t pay it back because you have to close the doors, the business cash advance provider is out of luck. As long as you didn’t provide any false or misleading information during the application process, there can be no recourse. Simply put, the asset in the purchase and sale agreement (your future credit card processing revenue) doesn’t exist anymore.