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In Factoring Fundamentals, Jeff Callender prudently
explains that it is generally not feasible to factor invoices on goods or services sold to consumers. This makes good sense for a number of reasons.
For example, let’s say you engage a landscaper to furnish and install
a number of trees, plants, flowers, and shrubs in your back yard. Next, assume the landscaper completes the job and mails you a $3,000 invoice due in thirty days. Can you imagine a factor calling you on your home phone and
asking you if you’d be willing to sign an acceptance/verification indicating that the landscaper completed the job to your satisfaction and agreeing to deliver payment not to the landscaper but to the factor? Clearly, for this
and numerous other sound reasons, traditional factoring just won’t cut it for a landscaper who caters to homeowners.
Being a contrarian at heart, however, I set out to profitably prove Jeff wrong on the subject of
providing factoring services to businesses that sell to consumers. They said it couldn’t be done. Enter the new breed – the cash advance on future credit card receivables – or just plain Cash Advance for short
The Cash
Advance is the confluence of factoring and credit card payment processing. The concept evolved while discussing our factoring operations with one of my closest, long-time friends who happens to be the cofounder and CEO of
Merchant Data Systems, a full-service payment processing company that provides, among other things, Visa and Master Card processing services to thousands of independent merchants. You can visit the company online at www.merchantdatasystems.com.
We put our heads together and realized that a merchant’s historical processing volume is a pretty good predictor of future credit card transactions. Now,
Merchant Data, like all payment processing companies, charges its merchants a fee to conduct credit card transactions. For example, a small restaurant might pay a fee of 1.85% to accept payment from a customer who chooses to
pay for a meal with a Visa card. In this case, therefore, if the restaurant sells a dinner for $100, the processor withholds $1.85 to manage the transaction.
So, that $1.85 is a fee that the processor collects. We
reasoned that since the processor is in the business of collecting processing fees, why not also figure out a way to collect factoring fees from merchants who want to factor their future credit card sales. Enter the Cash
Advance and our new mutual creation, Money For Merchants. By the way, you can visit us online at www.moneyformerchants.com.
Here’s how it works. Assume that a merchant, “The Friendly Diner,” is a small restaurant that processes about $14,000 in gross monthly credit card
processing volume. Assume further that Money For Merchants agrees to provide The Friendly Diner with a Cash Advance of $12,000. Under the terms of a Money For Merchants Cash Advance Agreement, we might require The Friendly
Diner to repay the Cash Advance plus factoring fees of $4,000 for a total repayment amount of $16,000. The Friendly Diner would also agree that Money For Merchants may withhold 19% of each Visa or Master Card transaction that
runs through The Friendly Diner’s processing terminal until the repayment amount is paid in full.
In this case, if The Friendly Diner’s average monthly transaction volume remains at $14,000, we will collect $2,660 per
month until the pay back of $16,000 is complete. There is no fixed date by which the merchant must complete repayment. If the merchant’s business picks up, pay back speeds up because we’re withholding 19% of above average
processing volume. On the other hand, if the merchant’s business slows down, pay back will take longer because our monthly fees collected will decline.
In other words, unlike a bank loan, there are no fixed monthly
payments. Money For Merchants simply deducts a portion of the merchant’s credit card transaction sales until the amount due is paid in full. Most merchants find that the Cash Advance is as close as you can get to a stress-free
way to increase cash flow. Unlike traditional bank financing, there’s no requirement to pay back monies by a date certain. Furthermore, the payments occur automatically, transaction by transaction, a little at a time. The
merchant never has to write a check to Money For Merchants to make payment. The funds we collect simply appear as a fee on the merchant’s credit card processing statement.
So, you may ask, does Money For Merchants pay
broker fees to factoring brokers. The answer is a resounding yes! We’ve structured a commission schedule as unique as the nature of the transaction. Give us a call at 301.718.1888 to discuss the program or send an email to contact@moneyformerchants.com.
And don’t forget to visit our web site at
www.moneyformerchants.com. By the way, through our factoring company, Bethesda
Financial Services, we also provide traditional small receivables factoring. You can visit us at www.bethesdafinancial.com, send an email to
contact@bethesdafinancial.com, or call our office at 301.652.6366. I’d be pleased to converse about factoring, Cash Advances, credit card processing, or any combination of the three! I
look forward to hearing from you.
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Adam Drescher spent several years as a business development consultant before co-founding Bethesda Financial Services and Money For
Merchants. He enjoys the challenge of working with clients from diverse lines of business and catering to their specific needs. He is also a successful real estate investor. Mr. Drescher earned finance and international
business degrees at New York University's Stern School of Business and Master of Business Administration and Juris Doctor degrees at The University of Miami in Coral Gables, Florida. He can be reached via email at adam@bethesdafinancial.com.
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