Business Cash Advances and Working Capital Management

Although securing business cash advances has been a business financing option for several years, businesses historically seemed to prefer using other finance sources to get needed funds. The current uncertainties in financial markets have changed how merchant cash advances should be evaluated. While there are still other small business cash options which should be considered, the practical reality is that the choices available have changed dramatically for most business owners.

What has changed to make business cash advances a more feasible option for small business financing? Recent changes in most commercial finance programs have resulted in many businesses scrambling to locate new sources for working capital and commercial loans. Here are four of the primary reasons for a changing environment where business loans are involved.

First, the availability of unsecured lines of credit has all but disappeared for most small businesses. This was a favored method of business financing for years.

Second, banks are increasingly insisting on more collateral for their working capital loans and other commercial loans. For many business owners, providing additional collateral is not a feasible alternative.

Third, many business owners have previously used home equity credit lines to obtain needed cash quickly and simply. Most banks have reduced or eliminated these home equity loans in response to a nationwide residential funding crisis during the past year or so.

Fourth, a growing number of local and regional banks are exiting the commercial lending business. In some cases, the business lending focus has shifted to larger businesses with long-term ties to a bank. This has produced an immediate and negative impact on relatively new and small businesses which especially need more working capital help in a challenging economic environment.

The four significant business financing trends noted above have resulted in a practical need for most business owners to now look much more actively at business cash advance programs. With such financing, businesses can obtain working capital cash based upon their credit card processing activity during the past six to twelve months.

There are definitely problems or pitfalls to avoid with this specialized version of working capital financing for small business cash. In fact I have prepared a number of special reports on this specific issue.

One major pitfall of business cash advances is the presence of a growing number of seemingly predatory lenders. These lending groups typically have one or more distinguishing negative characteristics.

One negative characteristic is misrepresentation about how quickly business cash advances will be provided. While legitimate funding can typically be obtained in a month or less, business owners should be skeptical of agents who suggest that financing is routinely available in a week or less.

Another negative attribute is the apparent urgency by the lender to change the credit card processor used by a business. While there will always be legitimate reasons to consider changing the credit card processing arrangement, it should never be the first priority in a business cash advance program. If there is a rush to do so by the lender, it is probably due to a misguided attempt to obtain processing fees even if they are unable to provide a working capital advance.

The most pragmatic solution for avoiding potential entanglements with one of these questionable types of lending sources is to have a lengthy discussion with a prospective lender prior to taking any action. It is especially unwise for a business owner to submit an online working capital cash application without having such a detailed conversation.

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