Feb. 11, 2010
*Doug Golden is the director of funding & retail sales at the Sterling Funding Group, which provides alternative funding solutions and wholesale credit card processing to the restaurant industry.
You are a proud, hardworking entrepreneur of a pizza business. Maybe you are a franchisee with one or multiple locations or maybe you are a mom and pop outfit with three employees. Either way, when the time comes and you want to remodel, open a new location, purchase new ovens, pay for advertising, pay taxes, etc. what do you need? You guessed it. Money, cash, capital, moolah. It obviously takes money to grow. If you don't already have it stashed away in your mattress, where do you go to get the working capital you need?
Usually the bank is the first place a pizza business owner visits in this scenario. But chances are if you have applied for a business loan in the past 12 – 18 months, all you have walked away with from the bank is a lollipop off the counter and a load of frustration. So where can you turn? Family, friends, the pawn shop? If that doesn't work, you may have another option.
One of the growing and more popular forms of alternative financing is called a merchant cash advance. No, it's not one of those shady strip mall places where folks write a check and it's held until next payday. Merchant cash advances, also known as receivables financing, or factoring in the banking industry, has been around since the 1950s. It wasn't until a few years ago that retailers, restaurant owners and service businesses could take advantage of this type of funding.
If you are like most pizza restaurant owners, you probably already possess an asset you might not even know you have. That asset is your future credit card sales. Rather than waiting for incremental sales to come through your door over the next six to 12 months, you can sell a percentage of your projected future credit card processing receipts at a discounted rate in exchange for a lump sum of working capital for your business. Most cash advance companies can fund between $5,000 and $150,000 (per location) depending on your card sales and gross.
So how does it work?
It's really quite simple. You sell a specific amount of your business' future credit and debit card receivables at a discount in exchange for cash you can use for whatever your business may need.
Once approved, a lump sum of cash is deposited into your business checking account. The collection process is automatically handled by your business' credit card processor. As each day's credit and debit card transactions are settled ("batched"), a specific percentage is forwarded and applied to the remaining Merchant cash advance balance. Once the balance is completely paid you automatically begin receiving 100 percent of your card sales again.
How you benefit, 4 key points:
- You get quick and uncomplicated cash for your business usually in five to 10 business days without the headaches of a bank loan or financing. You can use the money any way you see fit for your business without stipulations.
- The money is unsecured. There is no personal collateral needed. If your business slows down or closes due to no fault of your own, your personal assets are safe.
- The advance does not affect your bank lines or credit history. Because it's not a loan, it's not a documented debt and is not reported to the credit bureaus. It won't interfere with current or future loans.
- The collection (payback) process is completely automated. There are no checks to write and no back end accounting to set up. Each time you settle your cards the agreed upon percentage is taken from your card sales. Unlike a loan where you make a fixed payment every month, your actual payments will rise and fall with your card sales. If you have a good day, you pay back more. If you have a bad day, you pay back less. For many pizza restaurants, the majority of their gross sales are comprised of credit card sales. Imagine having a payback setup that aligns with the majority of your cash flow.
And 4 things to be careful of:
- Make sure the funding company spells out clearly in their contract that they cannot change the retrieval / remittance percentage at any time during the repayment period.
To illustrate: If you agree to a $20,000 advance with a payback over a projected 12-month period with a retrieval/remittance percentage of 15 percent that funding company should be unable, by contract, to increase that 15 percent if your credit card volumes decline or the payback period extends past 12 months. Many companies reserve the right to do this - and their unfortunate clients could find that 50 percent of their daily processing receipts are seized vs. the 15 percent they had agreed upon.
Beware of the bait and switch. Some funding companies will offer a low factor rate of 1.10 to 1.30. This will seem attractive, especially for unsecured funds. But buried in the agreement can be hidden costs, fees, and/or penalties that can often bring the end payback to a factor rate of 1.50 or higher when all is said and done.
- Select a company that won't approve a funding that exceeds a certain percentage of your gross sales (not just your credit card processing volumes). This is a biggie and the better, more reputable firms in the industry strictly adhere to this principle. The typical ceiling rate is 9 percent of gross sales.
Do not, under any circumstances, agree to pay any origination fees, closing costs, application fees, statement fees (related to the advance) or any other miscellaneous fees or add-ons when applying for a cash advance. There are some less-than-ethical sales agents out there who are more than willing to pad their own pocket at your expense.
In summary, a merchant cash advance offered by a reputable company can be a good option for your restaurant when used strategically and responsibly. It's not for every business and every situation. If you are behind on your rent or simply just trying to keep your doors open, this is not the option for you. This solution is all about growth. If you can take a buck and make three then it's a great option, especially if your bank can't help. The cost of the funds can vary depending on business type and its dynamics. It is not bank money and never will be. The overall cost of unsecured funds will come at a premium compared to a traditional collateralized loan. For many business owners, the accessibility of the funds and return on investment can far outweigh the cost.
Doug Golden is the director of funding & retail sales at the Sterling Funding Group, which provides alternative funding solutions and wholesale credit card processing to the restaurant industry. You can reach him at DGolden@SterlingFundingGroup.com or 888-564-9564, Ext. 18.