Eschewing banks, some operators find fast, favorable financing with cash advance firms

Eschewing banks, some operators find fast, favorable financing with cash advance firms

After a small group of individual investors bailed out of Arlene Weston’s restaurant venture, the owner of Maroon’s, a Southern and Jamaican restaurant in Manhattan’s Chelsea section, turned to a cash advance firm to stay in business and fund future growth.

Through four agreements with AdvanceMe Inc., a Kennesaw, Ga.-based subsidiary of Capital Access Network Inc., Weston obtained $750,000 that allowed her to expand her eatery from 35 to 100 seats and open a second Maroon’s in Harlem’s Hamilton Heights neighborhood. In return, AdvanceMe collected a portion of Maroon’s credit card receipts each time a patron’s card was swiped.

“It’s not cheap money; it’s easy money,” Weston said. “It’s money a bank would never give you. But AdvanceMe knew I had great credit as a business person and good cash flow, and it’s that cash flow—and how much of it comes from a credit card—they use to qualify you.” The average dinner check at Maroon’s is about $38.

A growing number of restaurateurs without the patience or credit ratings needed to obtain traditional bank loans are finding quick funds through cash advance firms. Based on the decades-old practice of selling an interest in future receivables, the cash advance industry lends money with seemingly few strings attached in exchange for a portion of future credit card receipts. But those who have received cash advances warn that interested restaurateurs need to do their homework.

Weston said that she researched cash advance firms for months. “Some of the companies out there are really bad,” she said. “So be careful.”

Unlike traditional debt financing from banks, many cash advances are secured through minimal paperwork and no collateral. Firms also stress their more favorable payment schedules with no maturity dates and their ability to deliver funds in anywhere from 24 hours to seven days with relatively few questions asked. The dollar amounts advanced depend almost solely on a few months worth of credit card statements.

Less emphasized by cash advance companies, however, are fees that can hover above the prime interest rate, making cash advances more costly than traditional loans. Some firms also require operators to switch credit card processors so that payments can be made more directly to the cash advance firm.

Still, for restaurant operators in need of a quick cash infusion or those with less-than-stellar credit histories, the firms provide a welcome financing alternative that is partially paid off each time a credit card is swiped in their establishments.

Dave Ulmer, an Atlanta supper club and dance hall owner whose two units lost money in the wake of the Sept. 11, 2001, terrorist attacks and needed upgrading, maxed out his credit cards, borrowed from family and friends, and was chased out of banks while trying to keep his businesses afloat.

Through AdvanceMe, he received $650,000, which helped him to buoy his business and open a third venue. Today he operates Run Around Sue’s Dinner Dance Club, Diamond Dave’s Steakhouse Piano Bar and Dance Club, and Rack’s Sports Bar and Grill.

“I haven’t renewed or reapplied in about 11 months, but it is nice to know that if I get in trouble and need it, it’s there,” he said.

Not every operator is looking for big, six-figure sums.

Israel Casas, owner of an authentic Mexican dinnerhouse in Austin, Texas, called De Las Casas, said he received $10,000 of working capital from AmeriMerchant LLC to help his one-year-old, 100-seat restaurant. AmeriMerchant has offices in New York and San Mateo, Calif.

“The banks—forget about it,” he said. “They wanted collateral. They wanted a piece of the business. They didn’t like dealing with a startup. I heard it everywhere I went.”

As is the case with all nontraditional sources of financing, the level of professionalism and foodservice insight varies widely from firm to firm, said restaurateurs who have received cash advances. While no operators interviewed in this article suffered any financial misfortunes dealing with merchant cash providers, they urged peers to interested in such financing to be diligent in their research, noting that cash advance merchants are not commercial lenders and therefore are not subject to any government banking regulation. The cash advance industry also does not have a trade association to help establish industry standards.

The cash advance industry specializes in what is called receivables factoring, in which one company purchases the future sales receipts of another company, thus assuming the risk of those receivables for a fee. So if a restaurant owner needed $100,000, cash advance merchants say they would buy $100,000 worth of future sales for payment of between $112,000 to $120,000, the payoff amount.

Jeremy Brown, president of Rapid Advance, a Bethesda, Md.-based cash advance firm, said his company has provided more than $100 million in cash advanced money to small-business owners over the years, with about 40 percent of it going to restaurateurs. Gyms, health spas, beauty salons, auto repair shops and florists make up the rest of his customer base.

Brown said the underlying mechanism that makes the partnership between firms like his and an operator successful is whether the restaurateur maintains a positive and predictably consistent cash flow.

He noted that Rapid Advance might take from 9 percent to 12 percent of a fine-dining operator’s annual sales to repay the advanced capital. For the few fast-food franchisees that are clients, he said the company takes as much as 30 percent, mainly because fast food is largely a cash business.

Michael Berman, chief operating officer of Outside Ventures Ltd., the parent company of Tribul Merchant Services, a cash advance firm based in New York, admits that his field is not free of flim-flam operators.

“There are absolutely shysters in cash advances, and I would definitely compare them to being worse than the predatory lenders in the subprime-housing market,” he said, “because there are relatively low barriers to entry in the field.

“Restaurateurs should look to do business with full-service financial companies…that are well-established and beyond cash advances can do credit card processing, gift cards and ancillary services. Beware of agents who do not speak the language of the restaurant industry.”

David Goldin, president and chief executive of five-year-old AmeriMerchant, agreed, noting, “I like to think we are strongly self-regulated, and word gets around pretty fast who the bad salesmen are and what companies should be avoided.”