In response to banks often not willing to lend to clients located in the small business sector, new programs are constantly developed by alternative business lenders. The new lending approach stand to shift aside many of the traditional lenders like banks and credit unions.
Alternative business lending company Elite Merchant Capital has been piloting a new package called “Working Capital for Merchants”, which fronts small business owners a sum of cash as working capital and allows them to pay this back out of daily turnover.
Elite Merchant Capital spokesperson David Smith announced that 10,000 merchants participated in the program since it was first announced in 2014.
Here’s how it works:
Elite Merchant Capital provides select retailers with a set amount of cash in anticipation of future receivables from their existing debtors’ book. These funds are then repaid to Elite Merchant Capital by them taking a cut out of the merchants’ daily revenue.
Important to note is that Elite Merchant Capital’s new package is efficiently “cutting into a business’ every day income in order to pay back the advance. This is an element of cash flow which needs to be planned and budgeted for especially given that quite often these type of financing arrangements are entered into during a period when a business can least afford it.” So while businesses obtain the capital they require to get started, this comes at a cost, both financially as well as in terms of free cash flow.
A great advantage of this program, where it advances funds against debtor/receivables, is that funding can now be made available for businesses who typically could not qualify for traditional financing in the past, such as a business whose credit score might not be suitable for an outright loan at a bank.
In order to qualify for a typical advance against this program a business should be at least 6 months old and have a minimum gross deposit of $10,000. Program term varies from 6 to 12 months and cost of the capital averages out at around 20% to 25%.
Alternative Financing Programs like these offer several clear advantages:
- Minimal paperwork required to complete the funding process;
- It usually only takes 24 to 48 hours until money is transferred into the merchant’s account.
- Easy repayment method makes the cash advance program transparent since only small percentage of daily business cash flow is allocated towards paying back the advanced amount.
Elite Merchant Capital also offers another valuable option. Once a merchant has paid back at least 60% of the existing advance, Elite Merchant Capital will be open to consider to re-underwire a new advance, this most likely for more capital in addition to progressively better terms. This due to the relationship establishes based on the quality of debtors and payment history of the previous advance.
An interesting fact is that poor credit history does not always accurately predict the future growth or success of a business. Instead, it’s the ability to understand the cash flow cycle, understanding when to look for capital and equally important, having a strategy for how one will apply the capital to generate more profit or alternatively to speed it up.