The merchant’s cash advance is not a loan; it is the sale of future revenues from credit cards. This means that if a company collapses before its repayment, there is no debt.
Andy Fiscella, actor and owner of Dime, a bar and showroom in Los Angeles, knows that running a small business is like being a player on the Hollywood scene.
Just as a movie may turn out to be a hit or a flop, the actor may be wanted one day and fight the next, so the owner of a small business must be prepared for unexpected situations.
“You just never know when you’ll hit,” says NerdWallet.
After the financial crisis in 2008, his bar won a huge hit, but he found a way to roll with a blow like it does in movies.
He did it with the help of a small business lender AmeriMerchant, who offered a transaction that went something like this: We give you money quickly, and you repay us by giving us cuts in the future sale of credit cards in your small business. And if you leave the business, you do not owe us a penny.
Andy Fiscella, owner of the Dime bar and showroom in Los Angeles, used the merchant’s cash as a “financial buffer” several times.
This type of transaction is called a commercial cash advance. Technically, a company that receives money does not take out a loan, but rather sells part of its future credit card receivables. AmeriMerchant is one of the pioneers of this type of small business financing.
One of the things a small business owner considering this transaction should understand is that cash advances to traders are usually more expensive than traditional business loans. So it’s a compromise: you get money faster, but you pay more for that money. Nevertheless, this and other types of alternative financing for small businesses have become more and more popular.
Quick access to capital
About eight years ago, the founder and CEO of AmeriMerchant, David Goldin, became famous for winning a patent fight in court for a system of cash advances for traders.
Cash advances for traders aim to help small but solid companies that are looking for quick access to capital. This is a much better offer than these small companies could get from traditional banks, says Goldin.
General Director and founder of AmeriMerchant David Goldin.
“I will use this example,” says NerdWallet. “If you have a $ 60,000 business loan with $ 55,000 in your bank balance (and loan) going wrong, and you have $ 55,000 of merchant cash with us and you leave the business legally, you owe this bank $ 55,000. You owe us zero. “
The owner of the Fiscella bar, whose acting achievements include appearances in the television series “CSI” and in horror Thriller “Final Destination”, says that the merchant cash advance system works well for small businesses passing through a rough patch.
That’s what happened in his bar after a crash in the housing market and the Hollywood strike of writers, when some of his regular customers, mainly middle-management at the film level, “lost their expense accounts.”
“Our income has dried up,” he says. “We were in a way behind the bills.” That’s when he turned to AmeriMerchant.
The company offers two types of cash commercial advances.
If you’re just starting out and running it for at least two months, you can get a standard cash advance of between $ 5,000 and $ 500,000. A few key requirements:
- Your company has processed at least $ 7,500 a month in the sale of credit cards from customers for at least 60 days, and transactions take place at least 12 days a month.
- You are up to date with the rent and you have at least 12 months until the end of the rental period, if you are renting.
- During the last 12 months, there were no open bankruptcies, and the FICO’s personal credit rating was at least 500.
If you are a more established company, which means that you have been in business for at least two years, you can spend on Ameri Merchant’s “Platinum” cash advance of $ 20,000 and $ 500,000. Goldin says that Platinum’s advance costs from 20% to 30% less “for applicants who score higher in our own credit scoring model”.
- You process at least $ 20,000 a month in the sale of credit or debit cards from customers for at least 60 days.
- You are in good shape with the owner and you have at least 12 months until the end of the rental period.
- In the last 12 months, there were no open bankruptcies, and the personal credit score was 640 or more.
The company can get an advance payment in about 24 hours, and the money can be received in seven to 10 days, says the company.
How to pay it back? AmeriMerchant gets a certain percentage of your credit card sales until we repay what you deserve. This percentage is usually between 10% and 15%, the company says.
So let’s say you have a bar or restaurant and receive a cash advance of $ 20,000. “The repayment takes place by subtracting 10% to 15% of future credit card transactions,” says the company. In this case, the total repayment amount would be around $ 25,000.
Price fixing based on risk assessment
Goldin says that AmeriMerchant uses “risk-based pricing”, noting that “there are different rates depending on the business profile and the overall credit score”.
“In our scoring model, we take into account many factors – both the personal credit score and factors related to the activity,” he says. “Because these are small enterprises, there is a strong correlation between the personal credit score of the business owner and the company itself.”
Cash advances are usually repaid between 10 and 14 months.
Meanwhile, the interest rate on a loan from the US Small Business Administration loan program, known as loan 7 (a), is usually based on the current base rate plus an additional margin, known as a spread, of 2.25% to 2.75%. At the current best interest rate of 3.25%, a typical loan of 7 (a) would be charged from 5.5% to 6%.
The merchant cash advance is a “no recourse” financing. This means that the company explains in an e-mail: “If the restaurant leaves the business and says it owes $ 18,000 for the down payment, it will pay $ 0.000 to its supplier.” AmeriMerchant could not come after the business owner for money. It would also not affect the owner’s credit rating, says Goldin.
The fact that you would not get stuck with a debt even after your business failed may lead you to think: Why would the AmeriMerchant in the world take such a risk?
One of the factors is the increase in demand for financing small enterprises. “We are definitely seeing an increase in demand among borrowers,” says Goldin, adding that small businesses “want to hire more and open more locations to expand their business.” AmeriMerchant also has confidence in its risk assessment systems.
Big data affect the market
Another reason: technology, especially large data. This applies to emerging technologies that allow companies to collect and process huge amounts of information, including random things, such as tweets and Facebook posts, and use them to obtain information about consumers, businesses, borrowers and others.
For lenders, large data allow you to quickly decide whether a small business is a good credit risk or not, says Lisa Nestor, a consultant in the initial Payoff, who develops products to help consumers pay off their credit card debt, and the MBA candidate focuses on technologically advanced finance of the Anderson School of Management at UCLA.
These technologies give lenders a “detailed and realistic understanding” of a small business, he says. And they are able to do it “faster and on a larger scale”.
“You have many technology companies that give you access to data,” he says. “It’s a gold race to put the best bets on potential borrowers.”
Jeffrey Robinson, director of the Center for Urban Entrepreneurship and Economic Development at Rutgers Business School, says alternative internet providers, such as AmeriMerchant, offer real options for companies that badly need funding for small businesses.
“In some cases, $ 5,000, $ 10,000, $ 15,000 can do or break them because they need money for inventory, payroll, and they do not have access to it,” Robinson says NerdWallet. “There was a big problem. For me, it was a case in which the markets saw a gap in access to capital and found a way to close it. “
However, Nestor points to potential threats in this competition. “For a small enterprise, when capital becomes easily available, there is always the risk that you will take more than you need,” he says.
Make sure you know what you are doing
This is Fiscelel’s risk, the owner of Dime, considered when he turned to AmeriMerchant. He offers this advice to every small business owner who is considering paying cash to a merchant: “You need to make sure you know what you are doing. You need to make sure you understand the percentages, “he says. “They will disappear from your bottom line.”
He has already gone through several rounds of commercial cash advances from AmeriMerchant, he says. He sees the advance as a “safety buffer” that can help him get out of the financial congestion, which sometimes happens unexpectedly.
For example, an incident in a bar, like a fight, can cause a sharp rise in business insurance premiums. “If something goes wrong hydraulically or anything else, I have to fix it,” says Fiscella.
He emphasizes, however, the importance of discipline in the use of cash advances in the merchant.
“You do not want to take all of this and spend it,” he says. “You want to make sure that you have enough money in the bank so that you can cover it.”
So far, many small business borrowers are like Fiscella, according to Goldin from AmeriMerchant, who says: “Our insolvency rates are at the lower end of the spectrum, and our renewal rates are at the higher end, which shows that we’re actually helping, not hurting merchants. “.