For everyone who is new to merchant cash advances, it is important to put things in context and see what the financial solution brings in the big scheme of things. What merchant cash advances do is they open up a new financing source for small businesses that was previously unavailable.
A good way to contextualize this is by looking at large companies first. Large companies have CFOs whose job it is to manage balance sheets that are becoming more and more complex. For many people, particularly small business owners, the two main financing sources, in their mind, are either conventional debt or equity. You either get money from the bank or you find a partner who buys into the business. Selling off a piece of your business is by far the most expensive way to get funds, and the bank’s money is as cheap as it will get. However, as many of us know all too well, with the bank’s heavy focus on collateral and its senior position in your capital structure (ie the bank takes it all if things go sour), the terms on which you get the money are vastly different.
And while small businesses live in this reality where you can either go to the bank or to a partner, big companies have many unconventional sources of financing – mezzanine & convertible debt, preferred shares, accounts receivable securitization (factoring), you name it! And the cost of these types of financing is always somewhere between the two extremes of bank debt and equity.
The reality is, these solutions are unavailable for small businesses for several reasons. The first is scale – the legal bill to structure these complicated securities quickly outweighs the benefits of them for a small business, not to mention that investors that participate in these types of markets are looking to make larger investments. The second is that, for something like accounts receivable factoring, a small business that sells to consumers typically does not maintain an accounts receivable balance.
So what does a small business have? It has its debit/credit card sales stream. This is how we can fill the gap between conventional debt & equity. So if you see an opportunity to grow your business but the bank won’t give you the money to do so – remember, there’s a way to do it without the costly repercussions of selling a big chunk of your business to a partner! Check out our website to see how we do it.