June 18, 2009

• Restaurants
• Retailers
• Service businesses

Unlike a loan, there is not a fixed amount for the repayment installments or a fixed term. The factoring company will collect a small percentage of your card receipts until the amount you owe (the initial advance) is paid back — often at a rate of around 8% to 10% of your sales coming in through charge or credit cards. But just because a factor offers you a deal, it isn’t necessarily wise for you to accept the rate, even if it’s a low portion of your ongoing sales. That’s especially true heading into a business downturn.

“You need to leave yourself room,” says Gelburd, who advises small companies on business strategies. “You have to make sure that if your future business takes a hit, you’re going to be able to meet the terms.”

Gelburd offers the following additional cautionary tips:

•  Before you sign up with a credit-card factor, find out what the company would do if your sales fall off a cliff. “What’s their legal recourse?”
• If possible, don’t pledge your personal assets as a guarantee. “That’s fine when it works, and it has very sad consequences when it doesn’t, but it’s extraordinarily widespread.”

If you can’t get financing unless you sign a personal guarantee, look for another source of funding. “It’s very hard, but you have to find another way to do it.”

Related Topics

• Money

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Knowledge@Wharton, Article, recession, financial management

Join the conversation ( 4 )

• David Rubin 3 months ago

  

  Now you don't need credit cards for approval on a business cash advance. ACH BANK ONLY PROGRAM. Capital Stack (888)STACK-10www.BankCashFlow.com

• Genesis Capital 6 months ago

  

  This is an informative article but a little misguided, especially in the attention-grabbing headline. With the merchant cash advance products you can obtain at http://www.genesisbusinesscashadvance.com, for example, you don't need to put up collateral and the funds are unsecured. That means you can't be held personally liable against the business cash advance. The flexibility of the repayment far surpasses that offered by traditional loans. With the percentage coming from your monthly credit card sales, business owners never have to worry about late payments or rising interest rates. It's a flat percentage that never changes. If you have a bad month. It's okay. I wish this author would have written this article form a little bit more of an objective standpoint. Not that my comment is objective, I'm all about business cash advances. Unlike the author of this post, I'm not a journalist.

• ROBERT LABUTIS 1 year 8 months and 4 days ago

  

  This a good article written with a broad brush that covers some of the major points. There is absolutely no doubt that sales reps sell the products that make them the most money and often times that is the product that costs you the most. There are a number of good options out there but the key is finding someone that can explain the options available that are best for you. I know it is like trying to find an honest politician but they do exist. Also, most cash advances have no personal guarantee, while all micro loans that I know of do. There is so much unsaid in this article that I would suggest going to www.merchantcash.com/blog . There are so many articles there that give you details about what underwriters are looking for and also answers a question of whether or not you should get one if you have good credit. You may be surprised at the answer.

• Anthony Giuliano 1 year 11 months and 12 days ago

  

  This is a great article. When considering a business cash advance, business owners need to make sure they know what they are getting themselves into. Many MCA providers sell money to businesses without regard for their ability to pay it back, and they charge excessive fees. If you're in the market for a merchant cash advance, call Sure Payment Solutions or visit our website and let us walk you through some options to find a program that works for your business. www.surepaymentsolutions.com