When Your Bank Says No: How to Get Your Hands on Working Capital

by Jeremy Brown
November 27, 2007

Every restaurateur who has ever attempted to get a traditional business loan understands how difficult it can be to secure financing. When the bank says no, securing a business cash advance has become a simple solution for many restaurant owners.

While cash advance services have been around for many years, they have only recently become a popular choice for small and mid-sized businesses. One of the reasons for this is that business owners have become more educated about cash advances and cash advances have become a more common financing tool for small businesses. Business owners and their financial advisors understand that financial assets are sold everyday, including mortgages, automobile contracts and accounts receivable to name just a few. The purchase of cash advances is another example of this. Cash advance companies simply buy a portion of each credit card transaction at a discounted rate.

As a restaurateur in need of cash for an upgrade or expansion, you may have few options in regards to quickly raising funds. Business loans are not likely to provide you with the capital you need quickly and without a hassle. The cash advance, in exchange for a small percentage of your future credit card receivables, can be a good alternative.

Why obtain a cash advance?

Many experienced business owners cite the ability to secure working capital as a major factor in their success. Working capital is the money a business has available to use in day to day operations and is available for use for a variety of purposes aside from paying expenses. If you own a restaurant, then you already understand the need for working capital.

A restaurant's growth might depend upon improvements like expansion, remodeling, acquiring a new location or purchasing new equipment. Expanded inventory or seasonal merchandise can greatly increase the chance of success for any restaurant. Business cash advances can also provide solutions for paying off debts and taxes-- how the money is used depends on your needs.

Traditional business loans can be problematic for many reasons. One of the prime criteria for qualifying for a business loan is a good credit score. If you do have a good credit score, you will still be required to provide tax returns, financial statements, a business plan, a personal guarantee and collateral. You may be denied a business loan from a bank if you are new in business, have a low credit score or credit problem, do not have enough collateral or need under $100,000.

On the other hand, cash advances provide funds to business owners with less than perfect credit scores, and even to businesses that have been operating for only six months. In many instances, businesses can receive cash within two weeks of submitting a complete application.

One of the advantages of this type of financing is that the business owner is not personally liable for repayment, which is an important differentiator from a loan. Most cash advance companies do require, however, in their contract that if you breach the terms of the contract by diverting the payment of credit card receipts from the advance company, that personal liability may apply.

Also, many cash advance programs do not include a payback period, have no minimum payments and charge no application or processing fees.

Heres how it works

A business cash advance is not a loan. With a cash advance, there are no personal guarantees for repayment other than in the event of fraud or breach of contract, no liens or collateral, no fixed payment schedule and no business-use restrictions.

Repayment of the advance is based on future credit card receivables from sales of products and services. The finance company will buy a fixed amount of your future credit card sales at a discount. This means the cash advance provider would collect a fixed percentage from each Visa or MasterCard sale until your contract obligation is satisfied. Once the advance is received and you have complete control of the cash, a percentage of each credit card transaction will automatically be transferred to the finance company that advanced the money. The transaction occurs automatically and is hassle-free.

The cash advance provider gets paid only when you make a sale. A key benefit of this process is that the repayment of your cash advance follows the revenue trend of your business, ensuring that it is never a burden to make payments.

Do you qualify?

Each cash advance program has different requirements, but the standard programs approve over 80% of qualified applicants who typically get funded in less than 10 business days. The review standards in most cash advance companies are streamlined to provide an expedited approval process that requires minimal documentation.

The usual criteria for approval are as follows:

• The restaurant has been accepting Visa/MasterCard transactions for at least 6 months;
• has a monthly Visa/MasterCard volume of at least $2,500;
• has no unresolved bankruptcies;
• and has at least one remaining year on the current business lease.

If you are planning to expand or enhance your restaurant, but you've been unable to secure the necessary capital to make it happen, then a business cash advance may be the solution you need. Working capital helps restaurants, or any small to mid-sized business, to grow and prosper. Be sure to thoroughly discuss options with your cash advance provider, as terms and obligations may be flexible depending on your particular situation.

Jeremy Brown is President and COO of RapidAdvance, a company that offers business cash advancements to small and mid-size business owners who need capital.