MERCHANT ADVANCE LOANS
Small businesses see plenty of opportunities slip by because they don’t have the money to capitalize on them. Here is one of many examples:
Buying extra inventory ahead of high season
o Retailers often sell their goods for multiples of what it cost them to buy.
o Sometimes retailers can get substantial discounts for paying cash for inventory.
o There might be an auction of goods providing a retailer with a substantial money making opportunity but it is time sensitive and requires capital.
- Independent liquor stores - Many liquor retailers are gearing up for the holiday season by stocking up and making large inventory purchases.
Retailer buys an extra container of goods while overseas for $50,000 using a merchant advance with a payback of $65,000. He sells these goods over the following 9 months for $120,000, netting him an extra $55,000 after taking into account the cost of the advance. IS THIS TOO EXPENSIVE?
While merchant advances are not cheap, they are distinctly different than other sources of funding, and it is imperative that you and your clients understand why. It boils down to these two key differences:
- Not collateral based
- The only way to get a substantial unsecured capital injection into your business - cheaper than selling a piece of the company!
o you should compare a merchant advance to selling a piece of the company (i.e. finding a private investor). This will result in 1) considerable legal fees and 2) a significant piece of the company will be given away forever.
To summarize, it is important to think of merchant advances as a new way to fund corporate growth for small businesses. Larger businesses have access to “subordinated debt” arranged by investment banks (which typically pay 15-18% interest and require some shares of the company for a total interest rate of 20%+).
Merchant advances are the “subordinated” financing solution for small business.