This is a guest post contributed by Sean Murray, who is the founder of MerchantProcessingResource.com, the CEO of Raharney Capital, an entrepreneur that has played key roles in several start-ups, and an experienced veteran in the Merchant Cash Advance industry.
September is the month that many people in the U.S. pack their boogey board up in the attic. It’s the month that they stop spending money at the Jersey Shore, the point at which their extended getaways cease because the kids have to be at school every week. Hotels, stores on the boardwalk, and frozen yogurt shops are still tallying up the final earnings from Labor Day weekend. Either they have made enough to make it through the winter or they haven’t and it will make every difference in what they do next.
The high of summer may be winding down but the merchant cash advance industry is about to wind up. With October, November, and December in sight, there’s a sense of urgency in the air. Small businesses that shrugged off a few slow months earlier in the year will come to the realization that they are running out of time to be where they need to be. Hourly workers will start thinking about the extra shifts they’ll want to pick up, salaried workers are starting to think about their end of the year bonus, customers will expect fully stocked shelves, and extended family members want a Turkey dinner with all the trimmings. The kids want pumpkins and costumes and school supplies. It just so happens that none of these things are possible unless a business and its owner(s) are adequately capitalized.
It might already be too late to apply for a bank loan, but that assumes getting approved in the first place. Banks don’t typically make $10,000, $20,000 or $50,000 business loans. It costs them more to underwrite these small loans than they stand to gain on the return from them. That leaves the door wide open for non-bank lenders, many of whom offer merchant cash advances and related products.
Ask a retailer how much revenue they’ll generate this Black Friday or by New Year’s and they’ll more than likely tell you what they hope to make. Maybe they have an idea based on previous years but they don’t know for sure. Uncertainty, that’s the other thing that hangs over the end of the year. No one knows for sure how things will all play out.
The pressure can lead to snap decisions, some that will have lingering repercussions if not well planned. One mistake that comes to mind is structuring payments in a way that leaves the business exposed. By that I mean, choosing a fixed payment merchant cash advance or similar product and hoping that there won’t be any bad sales months in the near future.
Imagine a scenario where a business is predicting a rock solid Black Friday and holiday season and in anticipation of such, secures financing with a fixed daily payment that is due regardless of the outcome. If business goes as planned, that’s excellent, but if it doesn’t, a world of ACH reject hurt is going to rain down on the bank account. Each reject has a separate fee charged by both the bank and the funding company. A temporary problem can compound into a bigger one, especially if there is no way to immediately boost sales back up to correct course.
For some reason, the fixed option always sounds better, perhaps in part because variable rate mortgages got such a bad rap during the recent economic crisis. People are inclined to think that variable = bad and fixed = good.
The only problem with that stigma is that it has no relevance to payments in the merchant cash advance industry. Rather than tied to some national interest rate, merchant cash advances with variable payments are tied only to the sales of a business. That means if business revenue goes up, the amount paid towards the balance goes up. But if revenue shrinks, then so do the payments. When things are bad for the business, things are bad for the funder and when things are good for the business, things are good for the funder. Black Friday didn’t go as planned? So what! A variable merchant cash advance is like hedging a bet but with no cost for the hedge. In no other market does such a thing exist.
To utilize such financing though requires a merchant service provider and they’re not all created equal. The last three months of the year can turn into an utter disaster all over something as mundane as accepting plastic. Have a big sales say? All of those funds can get suspended in an investigative limbo for an indefinite time period if it exceeds the average day’s figures. Think increased sales during the holidays is an obvious trend? Not so to the fly by night payment companies.
Snap decisions, that’s something I said earlier. September is really bad month to make a snap decision to switch to a payments processor that isn’t well known or to stay with one for that matter. There’s no telling what will happen come the holiday season and I mean that sincerely. Will their tech support be unavailable on Black Friday while 100 customers are waiting in line to pay? Will the expected Monday deposit not show up until Wednesday? These nightmare scenarios can happen. Integrity is obviously one of the more established and reputable brands in the U.S. and I wouldn’t write for them if I didn’t feel they were a great choice.
Just as retailers jump the gun in promoting Halloween merchandise the day after Labor Day weekend, it may seem like I am a tad early to be talking about Christmas. But like it or not, the air is cooling in the northern half of the U.S. and fall is on everybody’s mind. The kids are back in school and the relatives will want to know where Thanksgiving is being spent. Friends and family will start to ask how the 2013 year was for business. When they start asking how it was, before it’s known how it will be, the pressure will be on to make decisions. It might already be too late to get money from a bank and a fly by night payment processor isn’t worth the risk. There’s plenty of time until there isn’t. The boogey board might still be damp but deep down everyone feels it, the year is almost over and it’s time to get to work.