Credit card factoring is a relatively new financial tool available to small to midsize businesses.  Sometimes referred to as a business cash advance or a merchant loan, it’s slightly different from traditional factoring.  In a traditional factoring arrangement, a business has provided a product or service to a customer, who will pay for that product or service within a certain period of time, usually 30, 60 or 90 days.  Once the product or service has been provided to the satisfaction of the customer, the business may decide that it doesn’t want to wait 90 days to get paid, so they enlist the services of a third party called a “factor”.  Let’s say the invoice amount is $10,000.  The factor may offer to buy the right to collect that $10,000 by paying $9,500 to the business upfront.  The business is willing to pay $500 to have access to his $10,000 right away, and the factor is willing to wait 90 days to get paid because they stand to earn $500 on their $9,500 investment.

Credit card factoring works similarly.  The main difference is that instead of buying the right to receive payments for a receivable that already exists, the merchant loan provider is buying the right to collect payments receivables that don’t exist yet, or future receivables (specifically, future revenues from credit card processing transactions).  There is significantly more risk involved simply because there’s no guarantee that the future receivables being purchased will ever come to fruition.  For that reason, the cost of this type of factoring is significantly higher.  That same $10,000 in receivables may only earn $8,000 for the business.

Because these receivables don’t exist yet, the way that the factor gets paid back is also very different from traditional factoring.  The business instructs its credit card processor to assign a small percentage of every sale to the balance on its contract.  That percentage can range from 5% to 25%, depending on how much future receivables the business is selling.  The percentage is also fixed, so the rate at which the balance gets paid back fluctuates with its credit card revenue.  Let’s say that the percentage agreed upon by the business and the factoring company is 10%.  If the business does $100 in credit card sales, the credit card processor will pay $10 to the factor, and forward the remaining $90 to the business like normal.  Likewise, the business may process $1,000 in sales the next day, in which case the processor will pay $100 to the factor and send $900 to the business.  And if the business doesn’t have any credit card sales the following day, then the factor doesn’t get paid anything.  These merchant loans can take anywhere from just a few months to 18 months to pay back completely, but no matter how long it takes, the amount purchased by the factor doesn’t change.  This type of financing has a fixed cost, so it does not get more expensive over time.  This is why merchant loans are great alternatives to traditional business loans.

The key to finding the best deal on your merchant loan is to let people compete for your business.  There’s a huge advance to working with an account representative at Sure Payment Solutions because we know the industry and have close relationships with the industry’s leading merchant loan providers.  The Sure Payment Solutions staff has helped facilitate over 100 million dollars in business cash advance transactions since 2006.  Give us a call today for a free quote.

It’s no secret that the amount of lending going on in this country is down as compared to pre-recession levels.  The NY Times article I posted yesterday seeks to blame the lack of lending on the business owners of America.  They claim that applications are down due to a general fear among business owners in regards to taking on debt.  The claim further goes on to state that business owners aren’t concerned with growth right now, instead they are simply concerned with staying afloat.  While it should be every business owner’s goal to stay afloat, growing and staying afloat are not mutually exclusive and any business owner who is not constantly looking to grow and expand is deciding to throw in the towel.  So, we’re here to encourage you to think about growth and imagine how you can take advantage of the current state of things to grow your business instead of sustain it.

Others, like myself, believe that the lending markets are down due to excessive declines by the nation’s lending firms, banks, and credit unions.  And that it is these declines that have stopped business owners from applying for credit.  There is the stigma out there that no one has any money to lend and capital is simply not changing hands despite low interest rates.  While this may be true of traditional banks and other lenders, it is not true for entire financial community.  In fact, in the wake of the first recession, many companies sprouted up to offer loans and loan alternatives to small business owners.  The recession was viewed as an opportunity to help the struggling business owners.

That’s pretty much where we are now, with hundreds of independent lenders seeking out small businesses that require financing.  One of the major problems with this system is the box that each of these lenders prefers their clients fit into.  The target market is so specific that it’s difficult for business owners to apply for the right kind of financing with the right company.  Luckily there are many companies whose sole purpose is to match a lender and a borrower together so that they do not have to search for one another anymore.  This matching process involves many steps but the most important is the industry type.

Most lenders offer funds to only a handful of specific industry types and any other applicant is declined simply for the type of business they run.  While this is very common, it is also very undesirable.  We’ve launching a new industry specific lending program designed to make a realistic and fair offer to any applicant no matter the industry or size of the business.  This is not to say that there won’t be declines, as there will be.  This is to offer everyone a fair chance at some financing regardless of their industry type.  In addition, we’ve broadened our programs to create stronger offers for the industries that have historically excelled with this program.

We’re confident that we’ll be able to provide you with some form of financing or working capital regardless of your business type.  The one restriction we have still yet to get passed is the time in business filter.  We have not found a successful way to navigate the start up market yet, despite trying our best to offer everyone a chance.  Still, we are working tirelessly to create a funding product for start ups that we hope to be ready for the launch of 2012.  Check back occasionally for more updates regarding new funding programs we are rolling out.

Business cash flow is one of the most important concepts for a business owner to understand in order to run a successful business.  Every business, at some point or another, has to deal with cash flow problems.  In fact, most business owners anticipate negative cash flow for the first several months or years of operation.  In order to get to the point where your business becomes profitable, you need to be able to get through this phase of business.  What separates successful entrepreneurs from unsuccessful ones is how they deal with this cash flow deficit.

The cash flow problems commonly encountered by business owners can be understood by comparing how much money has to be spent in order to provide your product or service and how long it takes for you to collect payments.  At its core, the solution to cash flow problems, aside from seeking capital infusion or taking on debt, is to delay your payables as long as you can and to encourage anyone who owes you money to pay you as soon as possible.

Managing Receivables

• Consider offering discounts for upfront payments.  It may be worth a few dollars to get paid upfront rather than waiting and having to worry about collecting later.  It can also foster customer loyalty.
• When taking on a new customer who isn’t paying cash upfront, pulling a credit report can be helpful to understand their willingness and ability to pay debts.  There’s more than just a credit score to consider.  A credit report can identify potentially harmful trends such as late payments or judgments filed by other people they’ve done business with.
• If you’re having trouble moving a certain product, don’t  be afraid to get rid of it at a steep discount if you have to.  Whatever money you can get from outdated inventory will be more useful to you than letting it sit in your warehouse.
• Issue invoices promptly.  The sooner you invoice someone, the sooner they’re likely to pay you.  You certainly aren’t going to get paid before you send an invoice.
• Businesses that accept a lot of payments by debit or credit cards should be aware of how long it takes their credit card processor to forward those payments to their bank account.  Many businesses wait 2 or more business days to receive deposits.  Next day funding is a valuable service that makes credit card sales available in just one business day.

Managing Payables

• If your creditors give you a 30 day grace period to make a payment, don’t pay it next week.  Wait the full 30 days.  It’s the equivalent of an interest free short term loan.
• If you find yourself in a situation where you need to delay your payment for whatever reason, do not be afraid to communicate with your vendors and let them know.  If you have a good history with them, you may find that they’re willing to understand and be cooperative because they want to keep your business.
• When choosing your vendors, don’t focus entirely on the lowest price.  Flexible payment terms may be more important than saving a few pennies.
• Sometimes, vendors may offer you a discount for paying upfront.  This should be carefully considered.  Reducing your overall costs, and therefore improving your margins, is important, but not if it is detrimental your cash flow.

Sometimes, despite our best efforts, we can still come up short on a cash flow basis.  Knowing all of your options can be the difference between surviving a negative cash flow situation and having to close up shop.  If you consistently have invoices outstanding and aren’t able to encourage early payments, consider invoice factoring.  For just a few percentage points, you can have immediate access to the money that’s owed to you and let the factoring company worry about collecting payment from your client.

A small business loan is usually a great idea too.  The problem is that it’s hard enough to qualify for a traditional business loan as it is.  When the bank sees that your having cash flow problems, they’re not going to be comfortable with your ability to make monthly payments.  Thankfully, there are alternatives to business loans to be considered.  An unsecured business loan or a business cash advance may be a good fit for your business.  I’ve written more about them here.

Many financial analysts have speculated at the current state of the lending marketplace and more importantly the cause for the current state of lending in this country.  Most studies end up inconclusive despite theories that demand is low, quality of applicants is low, and lending criteria has tightened.  Certainly the common perception among small business owners and other members of the financial community is that traditional financial services are more difficult to get today, whether its a business line of credit, business loan, or other small business oriented lending service.

As members of the financial community involved in actively seeking out interested parties and attempting to piece together opportunities that prove profitable for all parties, we have heard from many of our competitors and colleagues that demand is low, quality is low, and lending institutions are tight.  And so, we turn to the market analysis.  Attached to this article are the findings of the Federal Reserve Bank of New York in a small study conducted over the summer of 2010 taking a closer look at lending in New York.  Unfortunately, the findings are fairly inconclusive which may or may not be partly due to the small sample size for a study like this.

Lending Analysis

Still, I find it interesting that this study narrowed it’s view to a list of products that includes the following: personal credit card for use in business, change in limit on existing credit card, business loan, financing for vehicle or equipment, extension of existing business line of credit, new small business credit card, and new business line of credit.  No mention of business cash advances or Purchase Order financing, two of the fastest growing financial services of today.  I wonder if the data would have been terribly skewed if they had included those services.  For starters, chances are many of the businesses that were polled will have no idea what either of these services are, but a decent chunk of these business will most definitely have applied for one or both of these products.

This study attempts to ascertain what criteria lenders are paying the most attention to when determining approvals and have concluded that time in business and profitability were the most important factors.  Sadly, if we only lend to already profitable businesses who are well-established in our field, lending is likely to cease to exist.  More or less, we’re admitting that what we want to do is lend to those who have no need for it, or whose need is based in a desire to grow or expand in a way that current retained earnings would not allow.  However, there is most definitely a fear that if lenders continue down this path, there will be an even greater disparity between the upper and lower classes with the middle class continuing to disappear at an even faster pace.

But if there’s one thing we’re short on these days it’s solutions.  There is no obvious solution, and more so, who will be charged with changing the face of American lending and how will you enforce those changes?  Caution is a virtue, but risk and reward go hand in hand.  It will take bold ideas and risky entrepreneurs to turn this around, and there seems to be a noticeable shortage of those individuals in the financial sector today.

Here’s an interesting article from Businessweek about the many woes small businesses are experiencing.  The article mentions the receivables exchange, but it should be noted that there are a variety of options should cash flow become tight.  The best thing to do is anticipate the need before it arises so you are prepared to handle it when the time comes.  Sure Payment Solutions can help businesses like this by setting up receivable purchases, small business loan alternatives and other funding services to improve cash flow.