Foreclosures are going through the roof, home prices are declining, lenders’ underwriting guidelines have been tightened substantially, and it is very difficult for many business owners to obtain loans against their homes.
In this type of environment, many business people have to consider other options for raising sorely needed capital, especially if their credit lines with their banks are exhausted.
There is an alternative available for consideration. This is a mortgage against future credit card receivables for businesses that accept credit cards. Many types of business would qualify for these types of advances: restaurants, the hospitality industry, mail order companies, retailers, service businesses and so on. Many businessmen consider this type of mortgage to be a “lifeline” in times of need.
The good thing about this type of business mortgage is that it can be used for inventory in the upcoming busy season, to take advantage of substantial discounts by buying in bulk, to launch an advertising program, and for good old working capital. Typically, there isn’t a restriction on how you use the money. Another major advantage is that you can obtain loans against each business or retail/wholesale business you own. Also, if you are acquiring a company that has credit card sales, you can use their sales to help fund the purchase.
There are generally two types of arrangements that are prevalent, both of which are very expensive. They are:
-- A “loan” against future credit card receivables. Example: The lender charges you a flat daily rate which works out to an annual percentage rate of about 48 percent. No prepayment penalty.
-- The sale of future credit card receivables at a substantial discount. Example: The funding company might purchase $135,000 of future credit card receivables and advance you $100,000 in cash. In this case, prepaying generally does not lower your overall cost since you sold the receivables. This option is much more expensive than the loan route above. The equivalent annual percentage rate is 70 percent to over 100 percent depending on how quickly the advance is repaid.
The program typically works like this:
-- In business for at least one year.
-- Credit card sales have to exceed $3,000 per month.
-- Advances range between 80 percent and 250 percent of monthly credit card sales. Some funding companies will advance as much as $500,000 to $1 million or more.
-- Most advances are repaid by the funding company charging your bank account daily for a certain percentage of your credit card sales, i.e. 12 percent of your sales.
-- Typically, the advances are paid off in seven to 12 months.
-- Funds are received in three to 10 days from application.
-- Most funding companies require you to use a credit card processor they have an arrangement with.
-- Personal guarantees not always needed.
-- Your credit score is less of a factor since the advance is secured by credit card receivables.
-- Typically, 80 percent to 95 percent of businesses with credit card sales qualify.
-- When the loan is paid down to 20 percent of the original balance, it can be renewed or “re-upped” to the original balance.
-- The funding company files a Uniform Commercial Code Financing Statement (UCC-1) with the county, as a lien against the future credit card sales until the advance is paid off.
Many businesses take advantage of this type of business mortgage financing because it offers them a lifeline or essential working capital. This type of financing is expensive. If you can still get equity out of your home, you should. If you can borrow from banks, or relatives, or other low cost financing — you should. If there are no other options available, then consider these.
For most people, these rates and terms seem exorbitant. The fact is this is a very popular program that is spreading throughout the country. Maybe instead of being a borrower, it would make sense to investigate the possibility of being an investor.
In this case, one might consider investing in well-established companies that make these types of mortgages to businesses. The yield would certainly be much better than the yield paid on bank certificates of deposit.
Mike Ferguson is with Windsor Financial Services located in Granite Bay. His Web site is www.windsorFS.com.
