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QSR Feature
Cash in Hand
Credit card receivables can be a quick source of working capital—but at a cost.

Cash is king in America. More precisely, cash in hand is king. Look at the U.S. consumer savings rates. In 2005, personal savings rates dipped into negative territory for the first time—down to minus 0.5 percent, according to the U.S. Commerce Department. That means consumers not only spent all of their after-tax income but dipped into existing savings or borrowed money, often with credit cards, to cover their spending. Whether that spending went toward trinkets or the heating bill isn’t clear—presumably, it went toward some of both.

As we’ve come to rely more on credit, the credit card companies have made out well. CBS News reports that in 2004 credit card companies collected $14 billion in penalty charges and other fees, accounting for nearly half the industry’s $33 billion in profits. Those statistics were much the same in 2005.

Now that consumers can pay with credit cards in many quick-serve chains, a new source of working capital has come into play: the business cash advance against anticipated credit card revenues. Companies like AdvanceMe Inc., Merchants First, Merchant Partners, The Oliver Company, Cornerstone Funding, AmeriMerchant, and have come on strong over the past five years, as credit cards have overtaken cash in the retail setting.

The important question is how to make an advance work as a strategic business decision.”

Essentially, a financing provider purchases a portion of the restaurant business’s anticipated future credit card receivables at a discount. A qualified operator with a steady stream of credit card sales can access anywhere from $2,500 up to half a million dollars in working capital—often in fewer than 10 days from the time the application is approved.

There’s no denying these offers are attractive. You get a quick approval—often within 24–36 hours. Because a business cash advance is technically a business purchase, not a loan, it is not reported to credit bureaus, and there are no closing costs or application fees. Applying for this kind of funding is fairly simple and straightforward, although the requirements vary among providers. Most providers start the process with an online form, and then follow up with a call from an underwriter.

Restaurant operators must show proof that the business processes a certain minimum in Visa and MasterCard credit card sales, usually between $2,500 and $4,000 per month over a period of two months. The business owner must be current on all payments to the property owner (most providers call the property owner to confirm rent has been paid), and the business must not have initiated any bankruptcies in the past 12 months. The operator’s personal creditworthiness is often part of the approval considerations.

Most providers ask for six months’ worth of credit card statements and bank statements. Business longevity requirements vary. Some providers require the applicant to have been in business for at least 60 days, others for at least one year. Some programs offer funding to restaurants that plan to open within 30 days.

After approval, the transaction processor updates the operator’s credit card system to reflect the new account structure. Each day the credit card revenues are totaled and fees and processor discounts are deducted. (Not surprisingly, many of these providers also offer transaction processing services or partner with transaction processors.) Repayments take place over an agreed-upon period, often six to eight months, but the time can vary if there are wide fluctuations in credit card sales.

Fees for the cash advance are computed daily and can range from 1.25 percent to 1.45 percent, depending on factors like creditworthiness, length of time in business, monthly credit card volume, and average monthly sales volume. Most providers offer online monitoring of your transaction processing and fee repayments.

Thanks to technology, the cash advance and repayment can happen seamlessly. The important question is how restaurant operators can make credit card receivable funding work successfully for them as a strategic business decision. I ran the notion of business cash advances by a certified public accountant who has decades of experience keeping the books for small businesses, including restaurant companies. She was hesitant. By “borrowing” money this way, she points out, operators are undoubtedly paying a premium for the capital. She would have her clients consider this strategy only if the traditional banks have turned them down. Even then, she adds, she would want the client to get back on track with the traditional banks as soon as possible.

In the end, the same guidelines that help keep consumers out of a cycle of debt can help restaurant operators use business cash advances wisely.

First, be certain your business can indeed produce a higher income in the near term. (Or know that monthly expenses will soon decrease, perhaps through a rent rebate or payoff of an existing loan.) This is a purchase of working capital, and, like any consumer, you’ve got to know you can pay for what you buy.

Second, develop a strong strategy for using those working capital dollars—one that will help make your plans for higher top-line revenues a reality. Your plan might entail revisiting your media buys, creating more effective four-walls marketing, embarking on a renovation program, or installing a new, more efficient point-of-sale system that handles customer management software.

And third, know that there is wisdom in the old pre-credit-card ways. Remember that you can rely on traditional lenders and, if you’re a franchisee, the finance experts within your parent company for advice on keeping ample working capital on hand for the long term.

There’s no doubt restaurant industry entrepreneurs need to have access to a variety of avenues for working capital. Under the right circumstances, credit card cash advances can be one of those options. The key is to keep from entering a cycle of indebtedness. Naturally, you’d prefer to keep more of those credit card revenues for yourself—and the sooner, the better.

New finance columnist Lea Davis was QSR magazine’s founding editor.