By Cheryl Conner
In the not-so-distant past, the landscape for alternative lending was a territory fraught with predatory lenders relieving entrepreneurs of their precious capital at annualized rates as high as 70-90%.
Today, however, the cash advance and the invoice factoring sectors are increasing in both prevalence and popularity, with business growing in both sectors at double digit levels each year. The safeguards are increasing as the market for these innovative lending sources continues to grow. Even the “loan shark” reputation is decreasing as mainstream organizations such as eBay, Amazon and AmEx OpenExchange are now getting into the alternative merchant financing act.
For example, Stephen Shienbaum, CEO of Merchant Cash & Capital, founded MCC in 2005 and has led the company to provide $500 million in loans of some 25,000 cash advances to approximately 12,500 customers so far. The company employes 100 people in New York, but provides advances to clients throughout all 50 contiguous U.S. states.
“If someone has any kind of a credit issue, or if they need to borrow for 3-15 months as opposed to 5-10 years, the banks can’t help them,” he notes. “Small companies, with less than $5-10 million in annual sales, are particularly vulnerable right now.”
MCC has developed a variety of lending products to help these merchants by providing cash advance loans against their future credit card sales, to provide funds the merchants can use to purchase inventory, to manage cash flow to support staffing, or to accommodate growth such as opening up additional retail locations.
While MCC specializes in retail merchants, Tim Valdez, of Pavestone Capital, provides factoring loans of up to 90% of the amount of invoices due to his client customers in industries such as transportation or service. By managing the invoices of its clients, Pavestone also takes over the work and process of credit analysis and receivables collection, helping customers to conduct their business processes more efficiently and quickly.
To keep alternative financing safe, Valdez advises the following precautions:
- Does the funding provider understand your business? Different vertical niches have vastly different business processes that require high understanding and precision in order for the working partnership between business and factoring partner to succeed.
- Look closely at the management team of your funding partner. What do they know about the industry and how reliable are they? What is their source of capital? These precautions could have done much to eliminate the bad experiences and bad reputation merchant advances and factoring loans acquired during 2008-2009.
- Location isn’t a big deal. Industry specialization and experience is a far bigger criterion to consider in selecting a funding partner, Valdez says.
- What are the terms of the transaction? Examine all aspects of the funding agreement in careful detail. What portion of the cost is interest (the money cost) and what will you pay for the service component? How will these costs compare with your other funding alternatives? How will they be offset by the business growth and revenue security the funding will help you achieve?
Complaints about alternative lending firms, while growing more rare, are continuing to happen, industry experts affirm. However, responsible merchant lenders are doing much to make their practices self-policing, as Sheinbaum and Valdez attest. Having access to these innovative services at today’s competitive rates can make the difference between not only growing or not growing, but even between life and death.
While alternative lenders can provide the means for growth and cash flow salvation to a growing venture, entrepreneurs should examine these lending products and partnerships with both eyes open, to stay both sharp and aware.
Cheryl Conner is an entrepreneur and communications pundit from Salt Lake City, a weekly contributor to Forbes.com, and the founder of Snapp Conner PR. She is a frequent author and speaker on business communications.