April 1, 2023

Searching for Capital: What You Need to Know About Merchant Cash Advances

Joe Maguire: Ami Kassar. Joe Maguire: “I haven’t lost my shirt yet.”

Searching for Capital

A broker assesses the small-business lending market.

Every morning, before I start my day, I stop for a cup of coffee and a bagel near my office. I have to choose between the local Dunkin’ Donuts franchise and Maguire’s, a boutique sandwich shop. Invariably, I pick the sandwich shop. I know the owner, Joe Maguire, and I like to support him. Also, his coffee is great.

Mr. Maguire has owned the shop for almost a year. He knows his customers by name. I often see him at the back of the store loading products onto the shelves after a trip to Costco or helping with a breakfast run.

“How are you doing, Joe?” I ask.

“Hanging tough, Ami,” he replies with a smile. “I’ve almost survived Year 1, and I haven’t lost my shirt yet!”

As I walk to work, I feel good about my choice as a consumer, but I don’t feel great about how our banking system is treating Mr. Maguire and millions of other small-business owners like him. The life of a small retailer is tough these days, and there are few signs that it’s getting easier.

What, for example, are Mr. Maguire’s options if he wants to get a loan to increase or expand his business? What happens if the radiator goes out and needs to be replaced, or if the oven blows up in the back of the kitchen? What happens if there is a bad winter and sales slow unexpectedly?

Mr. Maguire probably cannot turn to a bank. He has two strikes against him: he hasn’t been in business for at least two years, and, unless he is one of the lucky few with equity in their houses, he has no collateral for a loan. The bankers aren’t interested in the coffee urns or the coolers holding Snapple.

If Mr. Maguire is lucky and gets good advice, he may find one of the few banks that still offer unsecured Small Business Administration Express loans up to $50,000. The good news is that if you can get one of these loans, the rates are reasonable. The flip side is that Express can still take a few weeks and lots of paperwork, and Mr. Maguire may not have time to wait.

In this situation, he may well turn to one of the merchant cash advance lenders that are having a field day in today’s economy and that will promise Mr. Maguire unsecured money in just a few days. The lender will review Mr. Maguire’s recent merchant processing statements, bank statements or both, and then make what is often a tempting offer. In Mr. Maguire’s case, the offer might be an immediate $20,000 in exchange for $25,000 of future receipts.

It sounds tempting because the owners figure they can get $20,000 immediately, and it costs only $5,000. Think about it, though. The $5,000 is 25 percent of the amount they’re borrowing, and it’s actually even worse than that. Considering that most of these loans have to be paid back within six months, the actual interest rate may be more than 50 percent. That is a lot for any small-business owner to swallow. The lenders can get away with the high rates because they are careful not to call these transactions loans. They say they are buying a piece of a company’s future revenue.

If you are in the market, here are some things to consider:

Insist on seeing all of the fees upfront, and make sure you understand every one of them.

Make sure you understand the terms. Some of these loans involve a daily fixed amount taken from your account; others take a percentage of your credit card sales every day. A lender, for example, might demand 10 percent of your daily credit card receipts until you have paid back the agreed-upon amount. Don’t focus on the 10 percent figure — that is not the rate you are paying. I had to explain to one client that his effective interest rate was more than 90 percent.

Insist that the cash-advance company provide at least a projected annual percentage rate, or A.P.R., for your loan. This makes it much easier to compare the advance with other options. In addition to an S.B.A. Express loan, there may be business credit cards or equipment leases available to you at better rates.

Shop around. The cash-advance business is competitive. Make sure you’re getting the best possible rate.

The sad reality of today’s credit markets is that many small businesses have no choice but to consider these types of loans. In our work at MultiFunding, we often find that there is no better option. Still, whenever I am forced to put a client into one of these high-rate loans, I think about Mr. Maguire and the struggle he is facing to build his business, as well as his crew of four employees who count on him. Yes, the merchant cash advance lenders and the hedge funds that back many of them are filling a need in today’s market. But there has to be a better way.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/30/what-you-need-to-know-about-merchant-cash-advances/?partner=rss&emc=rss

You’re the Boss: How We Decided to Go Global

Sustainable Profits

When I first suggested taking TerraCycle’s operations global, there was nearly a mutiny among my board members and executive team. No exaggeration, they thought I’d lost my mind. As quickly as I’d brought up the idea, it was tabled — that is, until I got a phone call in 2008 that set everything in motion.

The phone call came from PepsiCo-Frito in Brazil. The company’s executives liked what we had done with Frito chip bags in the United States, and they wanted to do the same thing in Brazil. As we’ve done with many brands, we had developed national collection programs for Frito’s nonrecyclable waste, its chip bags. People all across America can collect used bags and send them to TerraCycle. We cover the cost of shipping and pay 2 cents per chip bag to the charity or school of the collector’s choice. We then take the bags and convert them into materials including branded fabrics and plastic pellets. Our team then works with major manufacturing companies to use the new stuff in their products, effectively replacing the need for virgin materials. As an example, Olivet, a major supplier to Wal-Mart, now uses “chip-bag plastic” from TerraCycle as the plastic in the coolers it makes. This renders the chip bag nationally recyclable and produces a major win for the brands and their sustainability goals.

The executives with PepsiCo Brazil indicated that, if we weren’t prepared to open operations there, they would pay us to teach a local company how to replicate our business. It immediately became clear to me that if we didn’t seize the opportunity in other countries, someone else would get there first, and we’d never get another chance.

So I went back to my board, this time with a major corporate partner ready to go. The board members still had a concern, and it was a legitimate one — that the strain of global expansion would burden our operations in the United States and threaten the fiscal viability of the company. I made the following promise (not knowing for sure whether I could keep it): Money will not flow from the United States to our operations in other countries, I told the board. If those operations cannot subsist on their own, they will fail. With this, I got approval to start TerraCycle do Brasil.

This started a journey that has taken TerraCycle into 14 countries beyond the United States: Canada, Mexico, Brazil, Argentina, United Kingdom, Ireland, Sweden, France, Germany, Turkey, Israel, Spain, Holland and Belgium. And there are five more coming in the next nine months: Italy, Switzerland, Philippines, Chile and Uruguay. In most cases, the impetus to open in these countries came from domestic partners that have operations overseas. The companies we work with have global waste problems, and if something works in one market, they like to try it in others. For us, the process has been a learning experience like no other. I wish I could say we got it all right, but of course we didn’t. Here are a few lessons we’ve learned, mostly through trial and error:

1. Setting up a new entity in a new country can be expensive, and there are a lot of hurdles. Some countries require you to have a board that includes citizens of that country. Most require that all of your legal and financial work be done by firms based in the country. One of the methods I’ve found effective is to stretch free advice as far as it will go. Lawyers and accountants are often willing to offer free advice and services, all over the world, as long as they think there will be business later on.

2. Employment taxes can make hiring the right person difficult. I love Brazil and its progressive attitude toward sustainability, but it is frustrating to have to pay close to 100 percent taxes on every employee there. I also learned that it is critical to have local people doing local work. Public relations and customer service are great examples. To work effectively with media and customers, we need someone who not only knows the language but the local customs and norms. When we tried to manage our British public relations and customer service from the United States, we had no success. The moment we hired local representatives, our media interest and customer engagement took off.

3. Managing a global company can be complex. Our Trenton, N.J., operation employs more than 65 people, but none of our foreign entities has more than 10. When we begin operations in a new country, we hire a local general manager who works from his or her home, has no staff and wears the P.R., customer-service, operations, business-development and client-management hats all at once — just like a proper start-up. To maintain global oversight, our team leads in the United States are responsible for managing their counterparts in the rest of the world. Each country’s local general manager reports to me and to each of the United States team leads in their areas of responsibility. In other words, structure your team so that you can manage whatever you take on.

4. Adapt and continue to adapt. While every country in the world has a garbage problem, business and garbage are different everywhere, as are consumer attitudes, customs, retail demands, regulation and everything else. After six months in Mexico, we had fantastic P.R., but very few people had signed up for our program collecting Tang pouches. We realized that in some countries not as many consumers use the Internet for daily communications, so we had to rethink our outreach strategy. We began to focus on phone communications and leveraging local nonprofits to function as our ambassadors.

So far, we’ve been able to stick to my pledge – none of our domestic dollars are supporting the global expansion. And in 2010, our non-United States operations accounted for 10 percent of our revenue. In 2011, I expect our international divisions to generate more than 25 percent of our revenue.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton, N.J.

Article source: http://feeds.nytimes.com/click.phdo?i=4720a938f9d808b7b5215c2ff3ff6d84