Andy Fiscella, an actor and owner of the Dime, a bar and lounge in Los Angeles, knows that running a small business is much like being a player on the Hollywood scene.
Just as a movie can turn out to be a hit or a flop, or an actor can be in demand one day and struggling the next, a small-business owner must be prepared for the unexpected.
“You just never know when you’re going to get hit,” he tells NerdWallet.
His bar took a huge hit after the 2008 financial crisis, yet he found a way to roll with a punch the way it’s done in the movies.
He did it with help from small business lender AmeriMerchant, which offered a deal that went something like this: We give you money fast, and you pay us back by giving us a cut of your small business’s future credit card sales. And if you go out of business, you don’t owe us a dime.
This type of deal is called a merchant cash advance. Technically, the business receiving the money isn’t taking out a loan; rather, it’s selling a portion of its future credit card receivables. AmeriMerchant is one of the pioneers of this kind of small business financing.
One thing a small-business owner considering such a deal should understand is that merchant cash advances are typically more expensive than traditional business loans. So it’s a trade-off: You get the money faster, but you pay more for that cash. Still, this and other types of alternative small business financing have steadily become more popular.
Quick access to capital
About eight years ago, AmeriMerchant founder and CEO David Goldin gained a measure of fame for winning a patent fight in court over the merchant cash advance system.
Merchant cash advances are aimed at helping out cash-strapped but solid small businesses looking for quick access to capital. It’s a much better deal than those small businesses could get from traditional banks, Goldin says.
“I’ll use this example,” he tells NerdWallet. “If you have a $60,000 business loan with a $55,000 balance with a bank (and the loan) goes bad, and you have a $55,000 merchant cash advance with us and you go out of business legitimately, you owe that bank $55,000. You owe us zero.”
Bar owner Fiscella, whose credits as an actor include appearances on the TV series “CSI” and in the horror-thriller “Final Destination,” says the merchant cash advance system works well for small businesses going through a rough patch.
That’s what happened to his bar following the housing market crash and a Hollywood writers strike, when some of his regular customers, mainly midlevel movie executives, “lost their expense accounts.”
“Our revenue dried up,” he says. “We were kind of getting behind on bills.” That’s when he turned to AmeriMerchant.
The company offers two kinds of merchant cash advances.
If you’re just starting out, and have been in business for at least two months, you can get a standard cash advance of $5,000 to $500,000. Some key requirements:
- Your business has processed at least $7,500 a month in credit card sales from customers for at least 60 days, and transactions take place on at least 12 days each month.
- You are current on your rent and have at least 12 months left on your lease if you are renting.
- You have no open bankruptcies in the last 12 months and a FICO personal credit score of at least 500.
If you’re a more established business, which means you’ve been operating for at least two years, you could go for AmeriMerchant’s “Platinum” cash advance of $20,000 and $500,000. Goldin says a Platinum advance costs 20% to 30% less “for applicants that score higher on our proprietary credit scoring model.”
The key requirements:
- You process at least $20,000 a month in credit card or debit card sales from customers for at least 60 days.
- You’re in good standing with your landlord and have at least 12 months left on your lease.
- You have no open bankruptcies in the last 12 months and a personal credit score of 640 or higher.
A business can get approved for an advance in about 24 hours, and you can receive the money in seven to 10 days, the company says.
How do you pay it back? AmeriMerchant gets a set percentage of your credit card sales until you’ve repaid what you owe. That percentage is typically 10% to 15%, the company says.
So let’s say you own a bar or restaurant and you get a merchant cash advance of $20,000. “Repayment is done by deducting 10% to 15% of future credit card transactions,” the company says. In this case, the total payback amount would be roughly $25,000.
Goldin says AmeriMerchant uses “risk-based pricing,” noting that “there are different rates based on the profile of the business and the overall credit score.”
“We take in a variety of factors into our scoring model — both personal credit score and factors related to the business,” he says. “Because these are small businesses, there is a strong correlation to performance between the business owner’s personal credit score and the business itself.”
Cash advances typically are paid back in 10 to 14 months.
Meanwhile, the interest rate on a loan from the U.S. Small Business Administration’s most popular loan program, known as a 7(a) loan, is typically based on the current prime rate plus an additional markup rate, known as the spread, of 2.25% to 2.75%. At the current prime rate of 3.25%, a typical 7(a) loan would charge 5.5% to 6% interest.
A merchant cash advance is “non-recourse” financing. That means, the company explains in an email, “if the restaurant goes out of business and say they owed $18,000 on their advance, they would owe their merchant cash advance provider $0.” AmeriMerchant couldn’t come after the business owner for the money. It also wouldn’t affect the owner’s credit score, Goldin says.
The fact that you wouldn’t get stuck with a big debt even after your business fails may lead you to wonder: Why in the world would AmeriMerchant take on such risks?
One factor is the spike in demand for small business financing. “We’re definitely seeing an increase in borrower demand,” Goldin says, adding that small businesses are “looking to hire more and open locations, to expand their business.” AmeriMerchant also has confidence in its systems to evaluate risk.
Big data influences market
Another reason: technology, particularly big data. That refers to emerging technologies that let companies collect and comb through huge amounts of information, including random stuff like tweets and Facebook posts, and use it to gain insights on consumers, businesses, borrowers and others.
For lenders, big data makes it possible to decide fairly quickly whether a small business is a good credit risk or not, says Lisa Nestor, a consultant at the startup Payoff, which develops products to help consumers pay off credit card debt, and an MBA candidate focused on high-tech finance the Anderson School of Management at UCLA.
These technologies give lenders “a detailed and realistic understanding” of a small business, she says. And they’re able to do it “faster and on scale.”
“You have a lot of tech companies that give you access to data,” she says. “It’s a race for gold to make the best bets on potential borrowers.”
Jeffrey Robinson, academic director of the Center of Urban Entrepreneurship and Economic Development at the Rutgers Business School, says alternative online providers, such as AmeriMerchant, offer viable options for companies badly in need of small business financing.
“In some cases, $5,000, $10,000, $15,000 could make or break them because they need money for inventory, to cover payroll, and they don’t have access to it,” Robinson tells NerdWallet. “There was a big problem. To me, this was a case where markets saw the gap for access to capital and figured out a way to close it.”
But Nestor points to potential risks in this competition. “For a small business, when capital becomes readily available, there’s always the risk that you will take more than you need,” she says.
‘Make sure you know what you’re doing’
It’s a risk Fiscella, owner of the Dime, considered when he turned to AmeriMerchant. He offers this advice for any small-business owner considering a merchant cash advance: “You gotta make sure you know what you’re doing. You gotta make sure you understand the percentages,” he says. “It’s gonna disappear from your bottom line.”
He’s already gone through several rounds of merchant cash advances from AmeriMerchant, he says. He views an advance as “a security buffer” that can help him get out of a financial jam, which sometimes happens unexpectedly.
For instance, a bar incident, like a fight, could cause a spike in in business insurance premiums. “If anything goes wrong plumbing-wise or anything, I gotta fix it,” Fiscella says.
But he stresses the importance of discipline in using a merchant cash advance.
“You don’t want to grab it all and spend it,” he says. “You want to make sure that you keep enough money in the bank so that you can cover it.”
So far, many small business borrowers are like Fiscella, according to Goldin of AmeriMerchant, who says, “Our default rates are at the lower end of the spectrum, and our renewal rates are the higher end, which shows that we’re actually helping, not hurting merchants.”
That’s good news, as demand for small business financing remains strong.
“We haven’t even scratched the surface yet,” Goldin says. “There’s tremendous upside.”
You can find more information on the AmeriMerchant cash advance products on the company’s website.
Also check out NerdWallet’s report on how merchant cash advances work.
For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Logo via the Dime Facebook page. Fiscella photo courtesy of Andy Fiscella. Goldin photo courtesy of AmeriMerchant.