Businesses that may not qualify for loans, but do have steady ongoing monthly credit card sales, can now qualify for a relatively new form of financing — a credit card receipt advance. Based on the amount of credit card receipts the business processes on a monthly basis, a business owner can anticipate future receipts and obtain credit card receipt advances as a means of financing, based on that anticipated amount.
The actual amount advanced to the business will depend on the total of the anticipated credit card receipts. The lender will also evaluate the stability of the business, how long the business has been in operation (typically, the business will need to be in operation for at least one year), as well as the economic climate and how it may or may not affect the industry.
If approved, the business owner can use this source of funding to infuse cash back into the business for upcoming projects, expansion, or for day-to-day operations. Richard Shapiro, a broker at Condor International Financial Services in Tucson, Arizona, points to the benefits for a new business. “Often a new business does not have credit terms with suppliers and is paying cash on delivery. This allows them to have cash available based on their credit card sales. It also allows retail businesses to expand their inventory, particularly if they are heading into the holiday season,” explains Shapiro.
On the positive side, even without a strong business credit profile, a new business can obtain the money it needs, since credit card receipt advances are easier to obtain than bank loans. Banks, being traditionally more conservative, are less likely to base a loan on potential growth possibilities. Other lenders offering this type of financing are taking a greater — yet calculated — risk on businesses that they believe will continue to grow steadily. Some are making loan offers to approved businesses with no advance costs and no required minimum payments. A small percentage is then deducted from the ongoing credit card receipts.
The risk the business owner takes is that his or her monthly credit card receipts could begin to fall off, since the loan is based on the numbers remaining the same or growing. If business falls off, the loan and interest are still due, and this can spell major problems for a business owner. Conversely, if the business sees steady growth, the increase in credit card receipts over a period of time can allow for a greater loan and prove beneficial to a business looking to grow and/or expand.
Therefore, before considering a credit card receipt advance, a business owner needs to look closely at the consistency of the credit card receipts he or she is collecting each month. It can be very inviting for a business to jump at this type of opportunity after a few strong months only get in over its head. For this reason, the business owner needs to chart such receipts for several months before taking out a loan on such anticipated receipts in the future.
As with any potential loan, business owners should shop around and compare interest rates, fees, and terms from several lenders offering this type of financing. It is always advisable to clarify all of the terms and reread the agreement carefully. Also, since these lenders are typically not commercial banks, it is highly recommended that the business owner conducts some due diligence on the lender before venturing into such a financing deal.