Cash advances on your credit card receivables

We are often asked about companies on the Internet which advertise quick cash advances secured by your credit card receivables. Is this for real? What does it cost? Should we use these resources? Are these small business loans?

It is for real and it works exactly as they indicate. However, they are not unsecured small business loans per se. There are a number of fine and reputable companies that will make such advances. The way it works is simple: you are a small business that receives Visa or MasterCard payments. This means you have credit card receivables coming in each month. Such a company will immediately advance cash (for example 80% up front in seven days) based on those credit card receivables. There are typically no upfront fees or processing costs. As your credit card receivables come in, they will automatically deduct their fee. Unlike other companies that try to sell you small business loans or grants by paying a fee up front (watch out—our SBA loans prohibit such activity) these cash advance companies "put their money where their mouth is" and pay you first without charging any upfront fees.

But you have to be prepared to pay the price. The standard in this industry is to charge approximately 26%. This is termed a "discount rate". This is in addition to the percentage or discount rate you are already paying your merchant processing company. So, if you are paying a discount rate of 4% to process your customer’s credit cards, your total fees for using both services would be 30%. In other words, for every $10,000.00 of credit card receivables, you would be paying $3,000.00.

So, should we do this? In some circumstances it might be beneficial. For example, if you have a big job coming up, expect to receive a substantial profit but, need money now to advance payroll, materials, or inventory, it might be a good way of receiving your money up front. But if you simply need the money for everyday expenses, such as rent or payroll and don't expect your income to be much different in the future, you could be paying a high price when that 30% kicks in. It is especially ill advised if your business is struggling to stay afloat, since you are cutting off future and needed cash flow.

Such companies are easy to spot on the Internet, as they usually advertise as follows:

• Quick cash within two to seven days.
• No credit, or bad credit OK (it is secured on your receivables so credit is immaterial).
• No checking your credit report.
• No co-signers needed.
• Must have accepted Visa or MasterCard transactions for between six months and two years.
• Your Visa or MasterCard volume must be a least $1,500 to $2,500.00 a month.
• Applies even if you have recently been declined for a loan with a bank.

Good Luck. Strategies For Small Business.