In my last article, I discussed the advantages of merchant cash advances. While these advances can be useful, and a lifesaver in certain instances, catering businesses that rely on cash advances can run into problems as well:
Here’s what could happen:
• This is loan shark money. Usually the terms of these loans are meant to be six months or less. Real interest rates can be exorbitant.
• You need to begin paying the funds back immediately. If you are advanced money on Tuesday, a portion of your Wednesday credit card deposits go directly to the provider.
• A client of mine has described this practice crack cocaine for caterers. Once you start, you can’t stop. As soon as you have finally paid off your advance, you can get another one. Actually, if you have paid your initial advance down to a few thousand dollars, the provider may offer to roll it into a new deal, thereby increasing the actual interest rate even more.
• Providers may require you to switch credit card processors. You have to be really careful that all of your terms, conditions and payment percentages do not change.
• According to industry expert Steve Nicastro, “the merchant cash advance industry is not subject to federal regulation, because merchant cash advances are structured as commercial transactions and not loans. Instead, they are regulated by the Uniform Commercial Code in each state, as opposed to banking laws such as the Truth in Lending Act.”
If you do need cash and my methods previously discussed have not provided enough, getting a merchant cash advance is obviously better than going out of business. Just be careful that the solution does not cause another load of problems. Be sure to spend some time analyzing what is offered before you take a merchant cash advance.
Michael Rosman is founder of The Corporate Caterer, a membership website, training and consulting company for caterers and restaurateurs and who want to launch, or grow their corporate drop-off catering business. Michael has over thirty years of experience in the industry and has built an almost two million dollar a year corporate drop-off catering operation from the ground up. Michael can be reached directly at: [email protected].