A Business Cash Advance: One Answer to the Credit Crisis

Business Week recently featured an article discussing the credit crisis we have now been enduring for a year. (http://www.businessweek.com/lifestyle/content/jul2008/bw20080731_850024.htm?campaign_id=rss_daily).

While this article primarily focuses on the effect the last 12 months have had within real estate markets, it also states: “The credit crisis has spread to infect the automotive, airline, travel, and retailing industries.”

What does it mean to a business owner operating within one of these affected industries?

Clearing the Hurdles of the Credit Crisis
A successful business will not let the credit crisis become the obstacle that prevents growth and maturation…they understand and employ a variety of financial options to get through it. When one financial strategy won’t work, perhaps another will.

Understanding different financial products and services and knowing how to use each to its greatest strength is one solid way to build and maintain success.

A smart business owner clearly understands the effect that the credit crisis is having on an ability to borrow from banks as needed. By knowing more about the current state of the economy, successful business owners are realistic in what they subsequently expect from banks.

Banks are tightening their requirements. Loans are going to be hard for many businesses to secure. Successful business owners need to have a few alternative options at the ready to stay competitive. Understanding and utilizing these alternative options can help to clear the hurdles of the credit crisis.

How Does a Merchant Cash Advance Play Into This?
As the Business Week article points out, it is becoming necessary for many businesses to move beyond traditional financial institutions.

A Merchant Cash Advance is one great option for many businesses—and it has been so for over a decade. If a small business has been rejected for a loan, this does not mean they will also be rejected for a Merchant Cash Advance. Different rules apply.

While the credit crisis is having a big effect on the banks, it is not having the same effect on stable, established Merchant Cash Advance providers. Use this to your advantage.

So let the credit crisis have its birthday. If the banks are saying “No” more than ever before, you may not be out of options to get business capital as needed. A Merchant Cash Advance offers you a sensible and reliable alternative to consider.

What Do You Think?
Do you feel like the credit crisis is making it more difficult to run a successful business?

How does a Merchant Cash Advance differ from a business loan?

When evaluating all of your possible business options, it is VERY important to understand some of the clear distinctions between a Merchant Cash Advance (or “MCA”) and a business loan. Knowing how they differ will allow you to pursue the best possible solutions for the many circumstances your business will face.

A complete discussion of all of the differences is beyond the scope of this article, but the following are four basic points that can help you better understand how to evaluate your options:

• Merchant Cash Advance
  Involves the sale of an asset (a portion of future credit card receivables) by a business to an MCA provider.
  
  Typical Business Loan
  Involves the creation of debt by the acceptance of a sum of money with the agreement to repay the money with interest.



• Merchant Cash Advances
  There is no interest or interest rate because an MCA does not create a loan.
  
  Typical Business Loans
  Lender charges interest at a clearly established interest rate (either fixed or variable).



• Merchant Cash Advances:
  Collateral is not pledged to secure “payment” (i.e., delivery of the purchased receivables), but may be pledged to secure “performance” (see below).
  
  Typical Business Loans
  Often requires a pledge of collateral to secure repayment of the debt.



• Merchant Cash Advances
  Do not have fixed, regular payment amounts or a set maturity date.
  
  Typical Business Loans
  Usually have fixed payment amounts, and always have a maturity date.

What about personal guarantees?
Business loans sometimes require personal guarantees of repayment. A guarantor (the individual offering the personal guarantee) may or may not be the owner of the business/borrower, but many types of business loans cannot be arranged without some sort of personal guarantee to secure the lender’s right to repayment.

The lender can employ a personal guarantee to collect amounts owed under the loan from the guarantor if the borrower goes out of business or fails to pay for any other reason. Guarantees are usually pretty specific as to when and how they can be employed. Merchant Cash Advances do not employ personal guarantees of “payment” (i.e., that the business will generate and deliver the purchased future credit card receivables to the MCA provider).

However -- and this is very important -- Merchant Cash Advance agreements contain certain covenants concerning (among other subjects) how the MCA provider will collect the future credit card receivables it purchased (i.e., through the business client’s credit card processor). For example, Merchant Cash Advance agreements typically provide that the business client will exclusively use a certain credit card processor and will not switch its processor without the MCA provider’s consent. Merchant Cash Advance agreements often require that the owners guarantee the business will perform such covenants.

Basically, this means that if the business honors the covenants of the Merchant Cash Advance agreement but goes out of business anyway, neither the business nor the guarantor would be obligated to deliver the purchased receivables to the MCA provider, and the MCA provider bears the risk of loss. If, however, the Merchant Cash Advance agreement covenants are breached, then the Merchant Cash Advance provider can pursue the business and the guarantor.

Need More? For more answers to the differences found between these two options, we encourage you to send us your specific questions.

You can also access other posts in this blog to help you better understand how a Merchant Cash Advance Works, What a Business Cash Advance is, and figure out if you qualify for a Merchant Cash Advance.