Small-Business Owner’s New Mantra: Never Again

Small Business, Small Business Loans
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Small Business Mantra

Cory Elliott started a roofing and construction business from scratch four years ago. Like other small-business owners, she faced financing hurdles. Some customers took weeks to pay their bills, which sometimes made it harder to cover the costs of other work projects.

The 44-year-old St. Louis entrepreneur came to three conclusions after dealing with cash flow gaps:

  • Cash crunches happen. Better have a long-term financing plan in place.
  • Beware of quick and easy fixes to cash crunches. They can cripple your business.
  • Never try a merchant cash advance. “Never, never, never.”
Cory Elliott

Cory Elliott, with son Chase Elliott, emphasizes the importance of caution when seeking financing as well as a good nest egg.

Her money problems began because her business was growing fast. “We were really at a point where we needed the cash to continue with projects so we could keep revenue coming in the door,” she says. So she dipped into her own savings and turned to a commercial bank, hoping to get a Small Business Administration loan. But she couldn’t get the capital she needed.

That’s when her financial consultant recommended a company with a catchy name, Snap Advances.

And yes, she got the money she needed in a snap. A day after a visit from Snap Advances reps, Elliott was approved for a merchant cash advance of about $95,000.

How merchant cash advances work

She immediately discovered the way a merchant cash advance worked: Even before you get the money, a sizable chunk comes off the top for interest. Instead of $95,000, Elliott got $60,000. And once she received the cash, she had to begin making payments — about $560 a day. It turned out the annual percentage rate on her advance was 41%, which she terms “ridiculous.”

It didn’t take long for the payments to take a toll on her business. Her company was spending over $14,000 a month on debt payments, she says.

The financing solution aimed at easing her cash flow problem just made it worse. The debt payments ate into the company’s operating budget, which prevented her from buying “additional things to make our job more efficient.” She took a second merchant cash advance, swelling her debt to $130,000.

“I’ve had to, in some weeks, take money out of my personal retirement to fund payroll,” she says. There were times when she simply didn’t pay herself. “I mean that is not the way to run a business.”

Elliott eventually sought advice from St. Louis-based nonprofit lender Justine Petersen, which helps low-income individuals and families as well as businesses, and also obtained a debt consolidation loan from a commercial bank that enabled her to pay off all but $25,000 of her merchant cash advance debt.

Importance of a nest egg

Elliott said she definitely will stay away from merchant cash advances in the future.

Her main advice to anyone thinking of starting a business: Don’t do it “until you have a nest of money.”

Banks and lenders will tell you there’s money available, she says, but you must have a business track record to qualify. Without a nest egg to fall back on, you may find yourself with no other choice but a merchant cash advance.

“Do I believe companies should carry a certain amount of debt? Yes. It’s reality,” she says. “But high-interest short-term debt is not the debt to carry.”

Snap Advances did not respond to phone calls and emails for comment.

Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel. NerdWallet staff writer Kevin Voigt contributed to this report.

To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page.