Voice of the Restaurant Industry
Merchant Cash Advances (credit card receivable funding)... Good or Evil?
Okay....so you are a restaurant owner. Chances are you’re getting bombarded at least weekly by sales reps, phone calls, faxes, direct mail pieces, strip-o-grams, etc. approaching you with a unique program that can get you working capital based on your credit card sales. Sound familiar? Heads are nodding I’m sure.
Since it is becoming more mainstream every day, I am assuming most restaurant owners are somewhat familiar with what a Merchant Cash Advance is. I am also assuming others are not so familiar. I am writing this in hopes of soliciting comments and questions. I really want to know what thoughts, perceptions, and experiences (have you used this type of funding?) are out there.... both good and bad.
What is a Merchant Cash Advance? Here's the crash course. Well, first of all... it’s NOT a loan. There is no interest rate, APR, etc. It has a fixed cost known as a discount rate. It is a form of factoring or simply put.. a purchase and a sale. Merchant Cash Advance companies (aka the Factor) agree to purchase a percentage of a merchant’s future credit card sales at a discount. In turn, the merchant gets a cash advance (usually from $5K to $200K) against those future sales to inject into their business any way they see fit. In most cases without personal collateral or guarantees.
Because the Merchant Cash Advance company assumes all of the risk (advancing a merchant funds against sales that haven’t even occurred yet) this type of funding does come at a premium. This is where it gets scary. Discount rates range from 20% - 50%.
At some point most restaurant owners are going to need money. They may want to expand, replace broken or outdated equipment, fund an advertising campaign, buyout their bipolar cheez whiz addict evil partner, whatever the case may be. Now, we all know how much banks and traditional lending institutions adore the restaurant industry. That’s right... they roll out the red carpet every time they see you coming. They just can’t wait to lend you money.
Traditional wisdom dictates that when you go looking for money...get the best rate possible. If you can secure bank/traditional money at a good rate and good terms...go for it. It is without argument the best route possible. But for those out there that do not get the red carpet treatment from your bank...where do you turn? Friends? Family? Many have gone that route as well.
A Merchant Cash Advance is simply one more option to explore and it is a viable one. Again, the cost of the funds are high. With that being said...it is not for everyone. If you are needing working capital just to keep your doors open, meet payroll, pay off high interest debt, buy a new Corvette, or float yourself through a seasonal rut.....RUN AWAY! This option is not for you.
But, if you can spend $2 and make $5 or more...it’s very much worth considering. This type of funding absolutely has to be used strategically. There must be a realistic return on investment for it’s use. From my own personal experiences in this industry I have found that most of the business owners I have funded are opportunists. They find a way to make money, save money, or solve a problem with a Merchant Cash Advance. All without the headaches of traditional lending. 70% of them come back for future fundings as well. Many of these business owners are A&B paper, they use our funds to supplement their bank money. For others, the accessibility of the funds simply outweighs the cost.
So, is it Good or Evil? What’s your take?
Since it is becoming more mainstream every day, I am assuming most restaurant owners are somewhat familiar with what a Merchant Cash Advance is. I am also assuming others are not so familiar. I am writing this in hopes of soliciting comments and questions. I really want to know what thoughts, perceptions, and experiences (have you used this type of funding?) are out there.... both good and bad.
What is a Merchant Cash Advance? Here's the crash course. Well, first of all... it’s NOT a loan. There is no interest rate, APR, etc. It has a fixed cost known as a discount rate. It is a form of factoring or simply put.. a purchase and a sale. Merchant Cash Advance companies (aka the Factor) agree to purchase a percentage of a merchant’s future credit card sales at a discount. In turn, the merchant gets a cash advance (usually from $5K to $200K) against those future sales to inject into their business any way they see fit. In most cases without personal collateral or guarantees.
Because the Merchant Cash Advance company assumes all of the risk (advancing a merchant funds against sales that haven’t even occurred yet) this type of funding does come at a premium. This is where it gets scary. Discount rates range from 20% - 50%.
At some point most restaurant owners are going to need money. They may want to expand, replace broken or outdated equipment, fund an advertising campaign, buyout their bipolar cheez whiz addict evil partner, whatever the case may be. Now, we all know how much banks and traditional lending institutions adore the restaurant industry. That’s right... they roll out the red carpet every time they see you coming. They just can’t wait to lend you money.
Traditional wisdom dictates that when you go looking for money...get the best rate possible. If you can secure bank/traditional money at a good rate and good terms...go for it. It is without argument the best route possible. But for those out there that do not get the red carpet treatment from your bank...where do you turn? Friends? Family? Many have gone that route as well.
A Merchant Cash Advance is simply one more option to explore and it is a viable one. Again, the cost of the funds are high. With that being said...it is not for everyone. If you are needing working capital just to keep your doors open, meet payroll, pay off high interest debt, buy a new Corvette, or float yourself through a seasonal rut.....RUN AWAY! This option is not for you.
But, if you can spend $2 and make $5 or more...it’s very much worth considering. This type of funding absolutely has to be used strategically. There must be a realistic return on investment for it’s use. From my own personal experiences in this industry I have found that most of the business owners I have funded are opportunists. They find a way to make money, save money, or solve a problem with a Merchant Cash Advance. All without the headaches of traditional lending. 70% of them come back for future fundings as well. Many of these business owners are A&B paper, they use our funds to supplement their bank money. For others, the accessibility of the funds simply outweighs the cost.
So, is it Good or Evil? What’s your take?
Replies to This Discussion
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Permalink Reply by Doug Golden on -
Carol.... I feel your pain. I hear this from merchants all of the time. Because the Merchant Cash Advance industry is not regulated there are predator companies out there that do run boiler room phone shops. Many are off shore. I assure you that there are legitimate companies out there however. You just have to be careful as you would with any purchase or business decision.
If you ever get into a "financial jam" or have a strategic use for a cash advance... please contact me. That's why I am here. I will educate you and guide you any way possible. Again.. unfortunately there are clown companies out there doing this and you are right on for being wary.
Best of luck and fortune in your business ventures!
Doug Golden
AMI Funding Specialist
AdvanceMe, Inc.
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Non-OperatorPermalink Reply by Brian Edwards on -
I have known many a successful restaurateur to utilize services such as these, some by Tim Long himself. The bottom line is using the money to turn a profit, and relatively quickly, which can be tough in this business. If you use poor judgment, or are not using the money to make money, Merchant Advances typically come at much to high of a cost. If you use the money wisely, it can absolutely be worth it.
Just like many different industries, there are shady people working in them, but there are also good ones. I work in the merchant services industry, which typically carries not the best reputation even though there are plenty of honest, hard working, customer focused people working in that industry. I have heard of Doug's company many times, and I know Tim personally, as he is a fellow member of the Mid-South Restaurant Consulting Group. Neither come from a "boiler room" scenario, but some do in their industry, so make sure you are dealing with a reputable company (and perhaps even someone from FohBoh!) when utilizing these types of financial services.
My vote is absolutely good, if used correctly!
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Non-OperatorPermalink Reply by Robert Sloop on -
One of the most expensive forms of financing..............Interest rates are enormous
If your bank says NO!!!..............there might be a good reason.
Use only in an emergency
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Permalink Reply by Anna cuellar on -
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Permalink Reply by Tim Long on -
We offer a real loan product that cost half what a Merchant Cash Advance does. Our rate is 14.99% where the average Merchant Cash Advance rate is 35%, we are less than half!!! The loan is unsecured and we accept FICO Scores as low as 500.
You can visit our website www.lordlongco.com and click on the "How It Works" page. If you have any questions you can reach me at 901-324-5237 Tim
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