Several thousand dollars in financing costs.
As a business owner you may need capital for many reasons; cash crunch,
emergency, opportunity for growth. I hear different reasons every day. While the
reason you need capital now may be an important business management topic, it is
not important for this report.
You need money, and in today's tight credit markets that means your funding
choices are much more limited than 12 months ago. In addition, your personal
credit, industry type, time in business and company size may be compounding the
problem.
With that as our stated objective, let's discuss the industry basics so we can
then focus on the areas that will make the biggest difference in a successful
funding experience for your company now, and position you for more and better
capital the next time you need it.
First, the basics
If you've spend any amount of time researching this field you have probably
determined that there are dozens and dozens of companies that provide this type
of funding.
Not true.
There are five or six major companies that are responsible for about 90% of the
funding in this industry. Many of the companies you see online simply resell for
the company they have a funding relationship with.
I've spoken to a client recently who complained that after all his research; the
3 quotes he got were identical. When he told me the companies he was talking
with, I explained to him they were all resellers or brokers for the same finance
company. He essentially got 3 quotes from the same company (and wasted a couple
hours of his time).
Guideline funding criteria
In the industry, you will be able to qualify for 100% - 2
00% of your average visa/MasterCard monthly volume. So, if you average $20,000 in
, you should qualify for $20,000 to $41,000 in financing...depending. There
is a secondary criteria that all companies take into consideration that may
further limit the amount you will qualify for. (It is sensitive information that
I can not share, even here).
If you have been in business for less that a year, expect to be funded at the
lower end of that range. If you're less than 6 months in business you should
expect about 75% of your monthly average but you'll be able to get additional
funding in about 4-5 months.
Also, regardless of your time in business, you will need to have at least 20
credit card transactions per month to qualify for this type of funding.
Most companies will not fund your business if you are Internet only (although
we've just found one that will in some situations), in adult entertainment or
any of the "sin" businesses. The industry is currently having a very poor
experience with gas stations and convenience stores so funding choices are very
limited there both in funding choices and the amount of capital available.
With these basics as a foundations, lets look at a few "secrets" that are sure
to save you several hundred dollars and a few hours of wasted effort and
frustration.
1) 4 Never-Ever's
A) Never, ever pay an application fee. The reputable companies in this industry
will not even allow their brokers to charge a fee to clients. In most cases the
entire fee goes to the sales company or person you are talking with. Not only
will brokers give up on the fee when pushed, it should be a red flag to watch
your back for other little tricks.
B) Never, ever rent or lease a credit card terminal as a condition of your
financing. A good terminal has a wholesale cost of about $200 - $300 yet I've
seen merchants locked into a 3 year lease at $69 per month, because "it is
required by the financing company". THAT IS NEVER TRUE.
C) Never, ever sign a personal guarantee for this type of funding. There are 2
companies that have PG language in their agreement. If you are not working with
an independent funding advisor, make sure you read every line of your agreement.
D) Finally, never, ever provide collateral. This funding is unsecured and should
not encumber any of your personal or business assets which you may need for
other financial reasons in the future.
2) Who is the most competitive funding company based on your industry
type...Right Now?
This is an issue you'll rarely if ever hear a company or sales person talk
about, but every company has to manage their overall "risk exposure". If they
have picked up additional "exposure" of restaurants in the Gulf Region For
example, they may tighten their underwriting criteria for a period of time in
that geographic area.
If they feel as though they are over exposed in convenience stores, they could
tighten their underwriting criteria or reduce the amount they are willing to
offer or increase their pricing to offset that particular risk.
Do not get caught in this trap.
If that is the case and you are working with a person who only represents that
company, they will try their best to sell you that funding and convince you it
is well priced. An independent person will hopefully know enough to keep
shopping, or better yet, would have known in advance and never applied to a
company in that situation.
For several weeks in 2007 one particular funding company had too much restaurant
exposure in California and reduced their funding amount to compensate. Another
company did not want to finance gas stations and cut their funding limits in
half. Yes another company would only fund "seasonal restaurants" if they charged
a rate significantly higher than market.
In all these circumstances, there were alternative funding competitors who would
have provided much better funding amounts and less costly options.
Understanding this unique underwriting/risk management concern and how it
affects your funding request requires almost constant monitoring and industry
awareness. Without that, you will spend a great deal of wasted (and frustrating)
time interviewing, shopping and applying to companies unnecessarily. The
savings, however, can be significant and worth the effort.
3) Don't fall for "
" tricks
Last year I helped a merchant in Minnesota secure $32,000 in financing by using
just 18% of his v/mc sales for repayment. He informed me that he had a better
deal because another company was offering him "the same amount at 16%".
While that was true, he was going to pay over $2,800 for the privilege and the
contract he was going to sign allowed the company to increase the retrieval
percentage to 35% "at the sole descression of the company". (More on that in a
bit). Common sense eventually won out and he's been happy and successful with
his funding.
This story highlights the fact that one of the most important determinates of
your funding costs is the length of time you take to repay the company (makes
sense). Your "retrieval percentage" will dictate how long that process takes. I
often see industry sales people who use retrieval percentage to confuse
merchants and make some funding more or less expensive than it really is.
Let's take a merchant who averages $20,000 in monthly visa/MasterCard sales and
wants $30,000 of funding to take advantage of a business opportunity (they could
potentially qualify for up to $42,000). That merchant could take either of the
follow options.
A) $30,000 29% $39,900
B) $30,000 18% $42,750
One option is not better than the other, they just offer choice. Some merchants
want to have the least expensive cost of capital which is represented in A
above. However, if impact on cash flow is more important, option B is obviously
much better choice. It does, however, shift much more risk to the funding
company as it extends the repayment period by almost 75%.
This is very flexible financing and we could design an option that would only
require 10% of this merchants visa/MasterCard sales but he would only qualify
for $15,000 of funding. The flexibility allows for almost any design that will
fit your business, so do not be pressured or forced into any funding dynamic
that puts unnecessary pressure on your business.
Special Warning: While most companies in the industry guarantee they will not
increase your retrieval percentage (regardless of your processing volumes),
there are at least three companies who's contract give them the ability to
increase your retrieval percentage significantly. I've seen many merchants who
were unaware of this contract language get really hurt financially. Read your
agreement.
The direct answer here is... maybe. Many funding companies today offer the
option of not changing your merchant processor but there are three important
issues you need to consider.
A) Lower processing rates. As you may already know, merchant processing is 1) a
commodity and 2) intentionally very confusing. However, in this industry,
profiting from merchant processing is not a focus and every company will provide
you a "meet or beat guarantee" which means your processing rates will likely
come down a little bit, but they will certainly not increase.
B) Delayed deposits. If you do not change your processor, the funding company
will either 1) withdraw payment directly from your business account (no delay)
or 2) sent up a "lockbox" account which your processing will be deposited into
and
they will withdraw from there. The drawback with this approach is that it will
take an additional 2 days before you see your card sales deposited into your
account.
C) Better pricing. Funding companies have a much better repayment rate with
merchants who make payments through their processing than their business
checking account. Because of that, I can often negotiate a better repayment rate
for clients who repay directly through their merchant processing.
5) 3 Tricks to reduce your funding costs (you'll be surprised)
A) Participate in a volume discount. This always makes sense, but how do you
accomplish this on your own? Participate with other merchants. Based on the
amount of deals we do and volume of funding each month, we often can get better
pricing for our clients than they can get on their own. (Please forgive this
brief commercial but the results speak for themselves).
B) Don't go into the room alone. We have helped several hundred clients acquire
funding and have a strong understanding for the marketplace and current industry
dynamics that will affect your offer. Additionally, if you are dealing with a
company directly, should you expect the company to negotiate against itself?
C) Get a discount for good credit. While personal credit plays a very small role
in the approval process, strong credit combined with time in business can often
lead to a nice discount at the proper company. Good credit is an indicator of
lower risk and some companies will react to your good credit with a lower
repayment amount.
6) How to reduce your financing cost at renewal time
When you are initially funded the company takes a blind risk based on its
underwriting criteria and experience and hope for the best. When you need
additional money (almost 70% of merchants do) they are dealing with a known
quantity and have a much lower internal cost when offering addional money.
Some companies will offer better terms on your second and third funding because
of these factors. If not, push.
7) How many companies should you apply to for a maximum effect?
Many merchants and even some industry sales people will suggest that applying to
several companies can create a competitive environment and lead to cheaper
funding at higher amounts. Not true.
Today, the leading companies in the industry like to see a `clean submission".
Remember, every company will check your personal credit and if they see multiple
inquiries from competitors, they take a much harder look at your business and
may limit the underwriting amount because they interpret additional risk in your
deal.
The additional inquiries on your credit report do not help your score.
It is true that you can not get an approval without an application, but unless
there are special circumstances in your situation, you should be able to
determine the best company to apply to from your industry research. From there,
apply to that company alone to get the best results.
8) Beyond the money...The long term importance of your funding company
relationship.
About 3 years ago a new merchant client was selecting between two very similar
offers from two different funding companies. Other than a variance of $50 in the
repayment amount, "what's the difference?" he asked. Back then I advised him
that should flip a coin to decide. I've learned a lot since then.
This same merchant called me about 2 years later and needed some additional
funding. Three years earlier he explained he was not a fan of borrowing money in
any fashion so I was a bit surprised. As we talked, he explained that he had
just been through a divorce, his credit score was below 600, was a month behind
with his landlord and had a small tax lien against his business.
I advised him that was not a great resume to go shopping for money when I sent
him an application. The only company I could take him to was the one he had a
relationship with from years earlier.
I called the underwriter directly and explained that I was sending an
application that "did not look so good" and requested he pull the historical
file on the merchant I was submitting. Long story short, he got the funding
necessary to close his tax lien, bring his rent current and purchase the
equipment he needed to expand his business.
The other company we considered 3 years ago had since experienced some "adverse
underwriting problems" and was very tight on any new business they would
approve. My merchant would not have had a prayer with them and his 8 year old
business would have been in serious jeopardy.
They say it is a wise man that learns from him mistakes and a genius who learns
from the mistakes of others. We were lucky to avoid this mistake a few years ago
and I would strongly encourage you to do homework beyond just the funding
amounts offered to you.
Consider the length of time your new funding partner has been in business and
ask about their "renewal criteria" when you are making your funding decision. If
you have a good experience with your initial financing, you can create a long
term relationship that can provide unrestricted working capital for any
emergency or opportunity that may arise in your future.
Conclusion
This report has summarized much of my experience in merchant funding over the
past several years working with dozens and dozens of clients. This report
typically has one of two causes one of the following reactions:
1) You feel educated enough to venture out into the world on merchant financing
on your own and will probably know more than most of the people you will speak
with.
If you fall into this category, I wish you well and hope you'll feel welcome to
call if something confuses you along the way or just does not seem right.
2) Although you've learned a lot, you realize there is probably a great deal
more you do not know. Additionally, your "to-do" list is long enough and you'd
prefer to outsource the research phase of this process to an independent
professional.
If you fall into this category, I hope this report has convinced you that
working with an educated, independent advisor can not only save you time and
frustration, it will likely save you a good deal of money as well.
Either way, I wish you success in your business life and hope you will feel
welcome to call or email whenever we can help you with financing issues you face
in your business.
Call (240) 482-3590 To Talk Today!
"Todd got us capital during a really slow period after the devastating
hurricanes we experienced. We're now posting record sales and looking forward to
a great season and bigger profits than last year. At a difficult time, they
really came through"
Sharon W
Ellingtons Sanibel Island, Florida
It was a great relief to fine an independent, professional person who could
advise up about the best funding to help fuel our growth. I saved a lot of time
and frustration and the end result was the best funding available.
John A
Reveal Day Spa McLean, VA
Todd helped to secure funding that would allow my business to gain working
capital quickly and allow me to continue to expand. It was great having a
financial partner that understood my business needs and who kept the lines of
communication open at all times."
Sonya Wright Sportherapv,Inc
When we needed funding to help fund our growth, we wanted an expert who
represented our interest, not a funding company. Todd and his team were great.
We're in a better position now because of their help.
Cindi P
PMZ Group Norfolk, VA
About the author:
He has appeared in Financial Times, MyMoney, Fortune 500, and Investment
Advisory Magazines and on CAN, WNBC and in countless newspapers.