This guest post is by Denise O’Berry, author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success a book about how to get, manage and keep your cash flow on an even keel and where it belongs — in your business.

Because you, like many small business owners, forgot that you have to get paid to have a real business. That typically means issuing invoices and waiting for payment. Perhaps you’ve forgotten to bill for what you sold or maybe past due invoices are collecting dust in a corner. It’s time to turn that around right now. Here are six tips you can implement right now to get you on the right track.

1. Don’t be an invoice laggard — If you must issue invoices to collect your fees, make sure you get them out the door as soon as the work is done.
2. Set up drip payments — When you negotiate a contract to complete work, set it up so you get paid by deliverable. That way you have cash coming in the door periodically rather than waiting until the project is done.
3. Hold the goods — If you provide a service where you can place the deliverable in a transition state before final delivery to the client, do it. Give them an opportunity to give the project a final okay followed by payment before you release the product.
4. Offer discounts — Provide an incentive for your customers to pay their bills. If you normally require payment within 30 days, offer a small percentage off (5% to 10%) if they make the payment in 15 days. Everyone wins with this strategy.
5. Get on the phone — If payment is due from customers within 30 days and you’ve reached day 31 without a payment, call the customer pronto. The sooner you take action, the sooner you’ll get your money. Old invoices don’t die, they just become noncollectable.
6. Diversify payment methods — Give your customers options for paying you. Offer check, credit card, paypal, money order, and cash (yes!). The more options you offer, the less excuses people have for not paying.

So there you go. Six things you can do today to start improving your cash flow. And here’s a bonus tip. Never forget that your company is not a bank. Whenever you do work and wait to collect payment, you are actually floating a loan to your clients. Do whatever you can to turn that around.

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When it comes to Merchant Cash Advances,  we’ve now covered the good, the bad . . . and now its time for the . . . you guessed it – the ugly.

In my opinion, the nastiest part of the Merchant Cash Advance industry stems from the fact it is unregulated. (No, I’m not a huge advocate for more government regulation) – but when used incorrectly or fraudulently, this product has the ability to put merchants out of business.

It really comes down to cash flow – and, more importantly, the predictability of that cash flow. In the current economy, margins are tighter than ever. Therefore, if a merchant enters into an agreement that opens the door to unpredictable fluctuations in retrieval amounts (the percentage of sales recouped on a daily basis to repay the outstanding advance) – it creates a recipe for disaster.

Here are a couple of pointers to keep in mind before signing on the dotted line for a Merchant Cash Advance:

1.)  Make sure the funding company spells out clearly in their contract that they CAN NOT change the retrieval percentage at any time during the repayment period.

To illustrate: If you agree to a $10,000 advance with a payback of $13,500 over a projected 7 month turn with a retrieval percentage  of 15% – that funding company should be unable, by contract, to increase that 15% if the payback period extends past 7 months. Some companies reserve the right to do this  - and their unfortunate clients could find that 50% of their daily processing receipts are seized vs. the 15% they had agreed upon up front.

2.)  Select a company that won’t approve a funding that exceeds a certain percentage of your GROSS sales (not just your credit card processing volumes).  This is a biggie – and the better, more reputable firms in the industry strictly adhere to this principle. The typical ceiling rate is 8.99% of gross sales – meaning that approximately $91 of every $100 your business generates will remain in your company’s coffers. If a company does not express concern about this – shop around until you find one who does. You will probably get less money from a firm who follows this guideline, but you won’t be put in a position where you are giving up 20 or 30% of your total gross sales to repay the advance.

3.) DO NOT, under any circumstances, agree to pay any origination fees, closing costs, application fees, statement fees (related to the advance) or any other miscellaneous fees or add ons when applying for a cash advance.  Did I state that strongly enough?  There are some less-than-ethical sales agents out there who are more than willing to pad their own pocket at your expense.  Any type of fee like the ones noted above will go STRAIGHT into the sales rep pocket, folks.   I’ve seen agents add originiation fees of 10% onto the Cash Advance amount …  so on a $50k funding – they add ANOTHER $5,000 on top of the the already expensive cost of the money itself.  These agents then receive their full commission (typically 5 – 10% of the entire payback amount), plus the $5,000 they charged in made-up fees.

I’ll say it again – this product is NOT a loan. It is a true sale – ALL of the above fees are related to loans and don’t (or should’t) apply in the Cash Advance world.   Any agent who tries to tell you this is just the way it is – is not telling the truth. The more reputable funding companies will not tolerate this practice from their reps if they find out about it.

Run, don’t walk, away from any agent who tries to tell you otherwise.

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Yesterday, we covered the positives of a Merchant Cash Advance as a source of working capital for your business.   To recap: they are fast (funds are usually available within 5 – 10 business days); unsecured; don’t show up or tie up your personal credit; and are available to those with less-than-perfect credit and in industries that traditional banks won’t touch (i.e. restaurants).

Now, let’s look at the downside….

The MAJOR drawback when it comes to a Merchant Cash Advance is that  they are expensive.   Very expensive.  Take our earlier example – you would payback $14,000 on an advance of $10,370 (structured to be paid back within 7 months).   That is a fixed cost of $3,630 to use the money for 7 months!  Unless you’ve got a very specific use for that money that will result in a solid return on investment (ROI) – this kind of money might not make sense for your business.   (We’ll discuss a variety of scenarios where the use of this money does make sense in a future post).

The natural inclination here is to frame that fixed cost in terms of a corresponding interest rate – but that isn’t accurate.   Because this isn’t a loan – (remember – its a true sale involving the transfer of an asset) – you are actually looking at a discount rate.   In most cases, the discount rate on a Merchant Cash Advance is anywhere from 26 – 40%.  In some cases, it can go as high as 50%.  Most retailers are familiar with this concept and actually use it as a standard practice in their business.   For example, if a tire store offers a “buy 3 tires and get the 4th one free” – they are using a 25% discount rate.    By the same token, restaurants promoting a “buy one lunch, get the second one free” are offering a 50% discount.  In these cases, the merchant has evaluated (hopefully!) the impact of making this trade off with the positive outcome of bringing in the additional business.

This same concept applies with a Merchant Cash Advance.  If you can use this money to make more money than it costs – it makes sense.   If you can’t, it doesn’t.

It really is as simple as that.

Tomorrow, we’ll take a look at some other drawbacks to the Merchant Cash Advance (hint:  the industry is unregulated and there are plenty of seedy characters running around) and how to find a reputable funding company (they exist, but do your homework first).

Til Then,

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The Merchant Cash Advance is a rapidly growing source of alternative working capital for small businesses.  With a Merchant Cash Advance, a merchant sells a percentage of his or her future credit card receipts in exchange for an upfront lump sum amount.

Here’s how it works:

Let’s say your business does $10,000 a month in credit card sales and a funding company is willing to purchase 20% of those receipts over the next 7 months. Under this scenario, you could be expected to bring in $70,000 over 7 months. 20% of $70,000  is $14,000.  The funding company would then divide that $14,000 by a factor rate (typically around 1.35 for a 7 month program) to come up with the lump sum amount you would receive.  In this case, the upfront amount would be approximately $10,370.00

So, you would get $10,370 wired into your account in as little as 7 to 10 business days vs. waiting for that money to come thru your door in increments over the next 7 months. Many business owners find it helpful to have a lump sum of money on hand for a number of reasons, including tackling necessary renovations, paying taxes or ordering inventory.

The collection process for a Cash Advance is completely automated as the funding company will add their rates (20% in this example) to your credit card processing rates.  Then, each evening when you batch out your processing receipts – 20% will automatically be deducted and sent to the funding company until the entire payback amount($14,000) is collected. The remaining 80% would go to your account as it normally would. No fixed monthly payments (no checks to write), no hidden fees, no late fees, etc… (IF you are working with a reputable company!!!)

Other positive aspects of the Merchant Cash Advance include:

1.) A Merchant Cash Advance is unsecured.  That’s right.  There is no collateral involved.  Therefore, if you default or fall behind thru no fault of your own, you won’t lose your home or other personal assets.

2.) A Merchant Cash Advance won’t show up on your credit as an outstanding loan or line of credit.    Why?  Because it ISN’T a loan or line or credit.  This type of agreement represents a True Sale in that an asset is sold for an agreed upon price.   The asset in this case is a percentage of your future Visa and Mastercard sales.  The price is what the funding company is willing to give you now in exchange for the final payback amount.

3.) Your eligibility does NOT live and die by your FICO score.  It is a consideration in the overall underwriting process – it is just one of MANY factors that are evaluated.   A low credit score may account for anywhere from 5 to 15% of the decision, but it can be overcome if the underlying mechanics of the business itself are strong.

There are also a number of drawbacks related to the Merchant Cash Advance.   Check back tomorrow to find out what they are and to see if this type of funding might make sense for your business.

Til Then,

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