Getting back to basics for merchant cash advances and credit card processing is likely to be time well spent for most small businesses trying to cut costs and improve cash flow. This will often involve a review of potential critical problems to avoid with credit card factoring. As a key example, ensuring that the company providing the business financing does not rush to change credit card processors before determining if they can complete the desired working capital financing is one of the primary precautions to observe when a small business owner is considering a business cash advance. Attempts to change processing arrangements immediately are a clear indication of one of the most serious abuses seen during recent years for companies appearing to offer credit card receivables factoring. An evaluation of whether a lender can provide financing and in what amount is a more normal and appropriate initial approach for the commercial funding provider. Checking with the existing processor to determine their ability to facilitate repayment of the working capital to be advanced to the business borrower would then be the next step if the initial merchant cash advance findings were acceptable to the business borrower.

Even if their current processor is willing to work with the business cash advance provider, businesses should consider asking for a review of cost saving opportunities involving their credit card processing. This might be the perfect opportunity to review the cost structure currently in place for a business because this approach to working capital management is tied so directly to credit card processing activity. Many small business owners chose their credit card processor based upon a recommendation from a colleague or banker, and it is not unusual to hear that costs or terms were not reviewed thoroughly before signing a processing agreement.

A minimum monthly volume of credit card sales (which can vary from $7500 to $25000) is usually needed to obtain business funding based upon credit card factoring. A lump sum payment is received based on projected future credit card processing transactions when merchant cash advances are obtained by a business. As credit card purchases are processed, the business financing is repaid automatically and gradually (typically covering about six to nine months). Because they do not have another reliable commercial funding source, this strategy for obtaining working capital is used by many diverse businesses. Since banks are routinely reducing or eliminating business lines of credit in almost all areas for small businesses, the practical need to consider this option has also increased.

As indicated, future credit card processing activity is used to repay a business cash advance. A portion of each transaction is automatically allocated toward repayment. In order for this to happen, the processor must agree in advance to handle the requirement. Not all credit card processing providers will agree to help with the merchant cash advance repayment process. When this occurs, alternative processors can usually be arranged with minimal impact on daily business operations. A common occurrence is for a small business to realize significant cost reductions when replacing one credit card processing provider with another because costs were often overlooked when the initial agreement was signed.

While they were not discussed here, there are other working capital financing options to consider for a business which does not accept credit cards from customers as a payment option. Because many businesses have experienced both decreased sales and an increased difficulty in obtaining bank financing, a thorough review of basic credit card factoring and working capital management practices should be helpful to most commercial borrowers. The potential reduction of a significant business expense is likely to be appealing to even the most successful small business. It is usually a good idea to get back to basics, and this approach will be particularly valuable for small business owners if they can reduce credit card processing costs while increasing their cash flow with a merchant cash advance.

Steve Bush is the Founder of AEX Commercial Financing Group which offers credit card factoring, working capital loans and commercial mortgages to small businesses. He has delivered candid advice about small business financing options to commercial borrowers for 30 years. Stephen provides commercial loans, business consulting, commercial real estate financing and merchant cash advances throughout the United States.

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