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A flooded basement, a broken piece of equipment, a loss of electricity from a thunderstorm when you’re running a small business, the list of occurrences that can result in a sudden and unanticipated cash flow crisis seems endless. But when it comes to ways of getting the cash that’s needed to deal with them, the list is alarmingly short especially when a small business owner needs funds quickly and under reasonable terms.
Where can a small business owner turn for quick cash? Certainly not traditional lending sources. Banks and finance companies are famous for steering away from lending money to small businesses. And the amount of time and paperwork required just to apply makes them an unattractive alternative, especially when a small business owner is facing a crisis.
But the good news is that there?s a relatively new method of providing financing for small businesses. A new breed of out of the box lender? has begun offering small business owners a unique method of receiving funds quickly by making loans on the basis of credit card receivables and offering surprisingly favorable terms. This method is particularly attractive for restaurants.
Credit Card Receivable Financing companies advance money to restaurants and other small businesses by looking at their Visa and MasterCard (VS/MC) sales for the past 12 months. They then lend 70 to 100 percent of the average monthly volume of VS/MC sales, arranging for repayment of the loan by taking an assignment of future credit card sales.
The standard term of the advance is six months, although it may be extended to up to 12 months in certain circumstances. Payment is made automatically by withholding from the restaurant?s daily credit card batch settlement. The lender arranges for credit card transactions to go through a processor with whom it has a working relationship, then withholds a portion the standard is 15 percent of VS/MC sales to amortize the loan. Payment is automatic, meaning that a small business owner with a lot on his mind doesn’t have to worry about sending a check. In addition, once a relationship has been established with this type of lender, re-upping or taking out additional loans is quick and easy. In fact, this type of lender can be viewed as a readily available source of cash. This method of financing offers restaurants two tremendous advantages: the ease of the deal and a quick turnaround time. But another outstanding benefit is the exceptionally low financing cost. A typical cost of the advance is approximately $1,059 for every $10,000 advance over the standard term. In other words, the payback ratio is 1.1059, meaning the restaurant owner pays back $1.1059 for every $1.00 borrowed. In addition, the flexible payments make this arrangement ideal for restaurants and other small businesses. The payment is a percentage of VS/MC sales and not a fixed amount. If the business is doing well, the loan is paid back more quickly, thereby minimizing interest costs. The other side of the coin is that if sales are slow, the owner isn?t under pressure to make the fixed payment amount. The actual interest costs can vary depending on the daily sales figure since the payment amount is a percentage of VS/MC sales.
As some companies package their financing as sales and purchase of the merchants future credit card sales, it may not be easy to compare the deals that are offered. However, there are two aspects of the deal that it are important for small business owners to consider. First, is the amount of total payback versus amount of funding they will receive. This is typically described as “payback ratio” and it is calculated by dividing the payback amount by the funding amount. The second is the daily withholding percentage. This percentage represents the amount the lender withholds from the merchants daily credit card batch. In both cases, the lower the number, the better. By shopping around for the right lender, a small business owner can save $2,466 on a typical $10,000 advance over a six-month term. If businesses renew their advance, as most do, they can save close to $5,000 a year on a $10,000 loan. The bigger the advance, the bigger the savings.
One example of how a small business can benefit from this method of financing is a restaurant in an upscale suburb of San Francisco. When the coupled who own it unexpectedly faced a crisis a sewer break in the building’s foundation they found themselves in need of $6,000 to take care of it fast. They took advantage of this type of financing, receiving the money so quickly that there was absolutely no interruption of business. With a daily gross of $3,000 to $4,000 a day, they found that this type of deal was well worth it. In fact, they opted to obtain funding this way other times, using the money to purchase better equipment.
By using credit card receivables financing, getting approved for a loan is much easier and faster than it is when applying for a bank loan. In fact, it can take as little as five to seven business days from submitting the application to receiving the funding. When a restaurant or other small business is in a slow period, when an unexpected problem comes along or even when business is so good that a restaurant is looking to expand the cash that’s needed is available.
Written by Woochae Chung of American Microloan

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