Thursday, February 19, 2009

Alternate lenders

My Los Angeles Times In Box column this week addresses some of the red flags associated with merchant cash advance firms. With credit drying up and small business loans tough to find, many small business owners may be considering alternate lenders, such as credit card factors.

Factoring originated in the apparel industry, where a soft goods inventory didn't qualify for loans like those granted to companies with hard inventory and equipment.

Although the details of these loans vary, factors typically advance cash up front to buy up the company's accounts receivable. The factor then collects payments due and returns the funds to the company - minus a percentage for their service. Some companies also charge fees on top of their cut.

The column tells you what to watch out for if you're considering a merchant cash advance contract. For instance, you want a fixed repayment percentage, so that in slow months you're not asked to fork over more of your income to the factor.

You should also compare offers from several firms before you sign up with a merchant cash advance company. Look for the best deal you can get, of course, but also check into the reliability of the factoring firm itself. Talk to some of their clients about how they view the relationship.

Factoring is costly and if you can find funding elsewhere, or bootstrap your operation, you should do that. But many small companies successfully use this method of boosting their cash flow.

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