By Seth Broman
Tight credit restrictions and high loan eligibility requirements are leaving business owners—and pizza operators in particular—with few options when they need working capital to fund renovations and repairs or purchase much-needed, expensive equipment. Although it’s slowly becoming easier for small businesses to gain access to capital, the number of small business owners who successfully qualify for the loans they need remains at a historically low point. Looking beyond traditional finance options, businesses are increasingly turning to business cash advance services to acquire the fast capital they need.
Also known as unsecured business financing, the increasing popularity of business cash advance services is driven by relatively low personal credit requirements and the simple and quick process of obtaining the cash advance. A decade ago, before the economy went sour, there were only about 10 firms in the U.S. providing business cash advance services, and today the industry has grown to more than 40 firms nationwide. In 2011, the nation’s largest providers of business cash advance services issued up to $8 million in business cash advances each month, which is up from $5 million in 2008, according to First Annapolis, a Linthium, Maryland-based electronic-payments consulting firm. One of the largest firms in the country, Merchant Cash and Capital, funded more than $80 million to small businesses and franchise systems in 2011 and a total of more than $400 million in small-business funding during the eight years the firm has been in operation.
But how exactly do business owners use business cash advance services to their advantage? Here’s how it works: The firm purchases the future revenues of the merchant at a discount. The amount of small business funding the merchant receives is based on their average monthly credit- and debit-card processing volumes, and most businesses can qualify for up to 200% of their average monthly processing volume, up to $250,000. Before receiving the advance, the business owner agrees to pay it back with an agreed percentage of future credit-card processing volumes, which are taken over a designated monthly period of nine to 12 months. After the agreement is signed, the money is transferred to the business owner in three to five days, allowing them access to the capital they need to run their business almost immediately.
Unlike bank loans, most businesses easily qualify for a business cash advance. To be approved, the business must be open for at least six months, accept credit cards and process an average of at least $5,000 per month in credit card sales.
Business cash advance programs are invaluable to many pizzeria operators as they have helped thousands of business owners stay afloat during the recession. Mark Giardina, owner of Fairlawn, Ohio-based Mr. G’s Pizzeria and Wings, an independently owned and operated business, has consulted Merchants Cash and Capital several times over the past few years to help him secure the capital he needed to renovate his aging restaurant and expand to accommodate more customers and drive revenue. With the advanced capital he received, Giardina was able to more than double the seating capacity in his restaurant from 34 seats to 98 seats and has added a banquet room to accommodate private parties. Giardina has also used business cash advance financing to purchase new equipment and hire more staff to accommodate the increase in business as a result of his expansion.
“The quick and easy financing that business cash advances provide has made the chaos of expansion and remodeling that much more bearable,” Giardina says.
In addition to pizzeria operators, franchisors and franchisees, faced with a lack of available funding needed to expand and open additional locations, have been hit hard by the credit crisis. Restaurant financing is one major component of business cash advance firms. A multi-unit franchisee of a major pizza brand with restaurants in Washington and Oregon recently was declined for a small business loan he needed to replace some of his aging ovens and to remodel his locations to bring them up to franchise-mandated standards. After being approved for a $150,000 business cash advance, he was able to fund the cost of the work and supplies he needed to continue operating his restaurants.
Another pizzeria franchisee used merchant cash advance small-business funding to increase his marketing efforts after he was unable to secure credit from the bank. After purchasing additional advertisements, the franchisee is expecting to see huge returns on his investment during the first quarter of this year. He also used the money to renovate the interiors of his restaurants. Unlike most pizza franchise systems, this pizza restaurant does not offer delivery, so it was important to ensure that the interiors were as modern and up-to-date as possible.
In these uncertain economic times, even valid business owners with solid credit are being shut down by strict lending procedures that make obtaining a small business loan nearly impossible. Business cash advance companies provide much-needed cash without affecting future cash flow and help many small business owners, franchisors and franchisees continue to operate and expand even in a weak economy.
Seth Broman is vice president of business development for New York City-based Merchant Cash and Capital, a privately held company. MCC provides working capital to restaurant, retail and service businesses by purchasing future revenues from merchants at a discount. For more information, visit www.merchantcashcapital.com or call (866) 960-6321.