When Greg Seares wanted to update his 10-year-old Bodega Wine Bar in Santa Monica, California, his bank wouldn’t lend him the money to renovate.
It was a stunner for the restaurateur, who also has a successful Bodega in Pasadena and a longstanding relationship with the bank.
Seares’ predicament is not unusual. According to a survey conducted by the National Small Business Association last year, 43 percent of those responding were not able to find funding at some point during the previous four years.
After studying his options, Seares turned to American Finance Solutions (AFS), a national merchant cash-advance firm that provides money via factoring.
“Since the banking crisis [beginning in 2008], many financial institutions have shut the vault to small businesses, especially in the $100,000 range,” says Scott Griest, chief executive of AFS. “We’re filling that gap.”
How Factoring Adds Up
The centuries-old practice of advance factoring involves a merchant selling future receivables to a financial entity, which advances a percentage of the receivables to the borrower.
With restaurants it is slightly different because it is based on projected sales, so the financial company takes a fixed portion of sales until full payment is made.
“When we look at clients, we focus on the health of their business,” Griest says. “If they are consistently profitable and have a consistent cash flow each month, we are usually able to make them a offer.”
The most important decision, the CEO says, is determining repayment terms.
“We don’t want to take too much money and put the merchant in a financial bind,” he explains. “The worst thing is to give businesses money and put them in a worse situation. We want it to be win-win.”
For a restaurant like Bodega, AFS typically will structure the payment at a certain percentage—say 12 percent—of each credit card swipe.
Another alternative financing company, Capital Access Network, provides working capital to small businesses nationwide using a daily repayment model—either a percentage of sales or fixed amount—for cash advances and loans.
“We base our decisions about working capital on each business profile,” says the company’s chief executive, Dan DeMeo. “We will look at historical sales trends and revenue, and use that as a way to project forward.”
The company employs data systems and other technology to help determine business patterns to project how to set up any financing deal.
“We say ‘Yes’ to about 70 percent” of prospective borrowers who go through the process, DeMeo states. The typical cash advance is $35,000 and the normal loan is $40,000.
“The shorter the term of the loan, the less expensive it is,” he adds.
For Bodega, which has about 100 seats and features pub grub, wine, and beer, a short-term cash advance was the perfect way to freshen the place and add a cover to the patio. “It just made a lot of sense,” Seares says.