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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:
And 4 things to be careful of:
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.
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.