Small Business Turns to Alternative Financing

While the demand for small business loans is up, a recent Federal Reserve survey shows the majority of banks are keeping credit tight. This is causing small business owners to turn to alternative financing options. The factoring industry is well-versed in how this need is fueling demand.

Two recent articles in CNN Money covered the ongoing small business financing challenges and highlighted one possible solution…

Merchant Card Advances

“Banks have backed away from making loans at a time when what many businesses have of value is cash flow and not physical assets,” said Slater. “That’s created a market opportunity for the cash advance industry.”

Those in the trade, such as AmeriMerchant and RapidAdvance, offer quick money with a hefty fee. Typical clients are restaurants and small shops, which take out advances that range between $5,000 and $200,000. A business owner who takes out a $70,000 advance will have to pay back $100,000. Lenders ensure repayment by immediately taking a fixed portion, close to 15%, of a sale every time a customer swipes a credit card at the shop.

Advances commonly take six months to repay and carry annualized interest rates of 104% to 177% if paid evenly every month, according to a 2009 industry analysis by consulting firm First Annapolis. Marc Abbey, an expert and managing partner at the firm, said figures are similar today.

Source: CNNMoney — Firms Turn To Riskier Financing 2/21/2012 and Small Biz Loan Demand Up, Federal Reserve Says 2/1/2012 — by Jose Pagliery.

The article went on to interview several business owners that used cash advances, including a new option from American Express that was rolled out in September. Express Merchant Financing from Amex now offers advances up to $750,000 with fees equivalent to a 6% annualized interest rate.

Other resources mentioned were Merchant Cash & Capital (MCC) and Kabbage, Inc.  MCC has been offering advances since 2005 and has funded nearly $400 million to more than 11,000 merchants. Their program requires business owners to process a minimum of $5,000 per month in credit cards.  They also offer commissions through their Independent Sales Organization (ISO) and MCC Reseller programs.

Kabbage, Inc. is a relatively new option that specializes in offering working capital solely for online businesses owners.  They support advances to online sellers using Ebay, Amazon, Yahoo Stores, Shopify, and Etsy.

How This News Relates to Factoring

Factoring involves an infusion of cash through the purchase of outstanding invoices or accounts receivables. Most factoring companies require the invoice debtor to be another business that is creditworthy. Merchant Cash Advance companies are advancing cash on anticipated credit card purchases, which often involve individual consumers or retail purchases.

So how does this news relate to the factoring industry?

1. It shows the ongoing need for alternative financing as banks continue to deny loans to small businesses.

2. It makes factoring discount rates look pretty attractive in comparison to some of the merchant cash advance fees quoted in the article.

3. It presents another potential avenue for earning income while filling a need. As a factoring broker or cash flow consultant you are likely to receive inquires from small business owners in need of working capital. Some of these companies will not be a good fit for factoring, however they might be candidates for other alternative financing options like Merchant Cash Advances. Many of these advance companies have partner or reseller programs that pay referral fees.

Want to learn more about the factoring business?

Be sure to check out the Factoring Bookstore for these informative training materials:

Factoring TrainingThe Small Factor Series by Jeff Callender includes 6 essential eBooks for anyone wanting to make money with small invoice factoring and accounts receivable financing. This how-to system includes all factoring fundamentals including case studies, marketing tools, scripts, and more!

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