Lending & Merchant Account Cash Advance

During a speech at George Washington University Federal Reserve, Chairman George Bernanke stated, “small businesses have…found it difficult to get credit.” [Now, if banks make money by giving loans, what is the cause? Possibly, Bernanke, to a small degree?] According to FDIC statistics lending has reduced dramatically. Perhaps, merchant account cash advances are an option?

Business loans under $1 million fell 13% between June 2007 and June 2011. In addition, the amount lent has dropped 19%.

In observance of Federal Reserve incentives, banking lending standards have increased. Therefore, fewer companies can qualify for loans.

Increasing their lending standards for risky mortgage loans, banks have relegated business loans as collateral damage in an effort to improve lending practices. This, ultimately, is a scar left behind by the financial crisis.

Small business loans and mortgage loans are inexorably linked together since many small businesses use home equity to finance their companies. Obviously, forcing the Fed to loosen standards would force us to revert back into the ballooning crisis we just got out of. So, the predicament lies as to where do we find funding for America’s small business?

To get suggestions, I emailed commentators, repliers and subscribers to my blog for answers. The replies were almost choral; because everyone had the same response…Merchant Cash Advance.

Small business owners who need cash infusions into their businesses are turning more frequently to this 10 year old industry. Cash providers, who generally charge premiums of 30% or higher are trying to promote a universal standard in order to avoid regulatory restrictions.

Businesses receive cash advances from providers [Note: I did not say lenders!] in exchange for future credit sales. The caveat, however, is that (because these companies may have little or no credit) businesses are charged interest rates (normally) ranging from 60% to 200% APR. Again, these transactions are not considered loans. They are regarded, none the less, as a purchase of future revenue. Therefore they are not regulated, and can collect from daily credit card processing proceeds. In addition, because some businesses are seasonal, payments are lowered during slower months.

According to Marc Abbey, managing partner of the consulting firm First Annapolis, there has only been a 10% penetration in this $5 billion dollar industry. Responsible cash advance companies, make a conscious decision not to collect too much too soon, so that client businesses can survive.

As mentioned before, this is a newer industry, being only 10 years old. Even now, lines are being drawn in the form of legal battles in heavy merchant advance states like California. Requiring cash advance companies to obtain state licensing, merchant capital advance companies now have expanded parameters for collection and terms.

Through expansion and newer innovation, MCA’s can now provide cash advances in the form of loans, lines of credit, funding on credit cards, and support leases. It can also complement bank funding.

In regards to salespeople and independent sales offices, be very careful. Before you enter into this arena, it is prudent to be well educated about the industry. I suggest you refer to the Electronic Transaction Association. You can find a detailed white paper on Merchant Cash Advance basics, there.

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