Discussion:Merchant Cash Advance companies
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Discussion Forum Index --> Basic Tax Questions --> Merchant Cash Advance companies
Discussion Forum Index --> Tax Questions --> Merchant Cash Advance companies
Actionbsns (talk|edits) said: | 29 November 2007 |
| My client called me yesterday all thrilled that he found this company - Advanceme, Inc.. This is a credit card receivable funding company and this is evidently a hot new method of freeing up cash from future sales, a form of factoring credit card sales. I'm having trouble agreeing that the interest being charged here is 20%. The terms appear to be that they have loaned him $78,324 by giving him up front $54,017.00, to be fully paid back within 6 months from his credit card sales automatically. The way I read the contract and a Wall Street Journal article is that they have discounted the $78,324 (is that the same as the present value?) down to $54017 and are saying that the discount is 20%. The only way I get $54017 to move even close to $78324 is to multiply it by 45%. These are situations that have always given me grief, can anyone help me out here? I'm not convinced this is a good deal at all and would like to tell him not to do it again when it's paid off. We are definitely after the fact on this transaction. | |
| 29 November 2007 | |
| a 31% discount for 6 months = a 62% annual rate. More if you factor in compounding.
(24,307 divided by 78,324) Does he still have all of his kneecaps? | |
| 29 November 2007 | |
| Kevin, I would use the loan amount not the repayment amount to compute interest rate.
Gets a whole lot more fun when you realize that this will be repaid not in one payment but in many (daily?) payments over the six months. Being bored I punched it into my old TValue program (DOS actually - why buy new when the old works?!) Assuming weekly payments of $3012.46 the effective APR is 231% Kneecaps? What about brains? | |
| 29 November 2007 | |
| You are right. Interest of 24,307 for 6 months on a loan of 54,017 amortized. | |
| 29 November 2007 | |
| Looked at their web site (told you I was bored). Loved this line in their FAQ's "Since this is not a loan ..."
It has been a few years since I studied finance, but when I was in school ... | |
| 29 November 2007 | |
| Any of our attorneys on board know how this gets around usury laws? | |
| November 30, 2007 | |
| I'm not an attorney, but my understanding is that usury laws apply to individuals (at least in Hawaii). I guess businesses are not protected in this area, at least regarding the rates charged.
| |
| 30 November 2007 | |
| It's quite the big thing for cash strapped businesses, when I owned my restaurant, I almost uused one of these services. When you need cash flow and there is no ther place to get it, these companies are there. It's a great scheme for the lending companies. Not only do they loan you the money, but they also become the processor for your credit card transactions, so they are making money on that end as well.
I did wind up borrowing the money I needed from another source, but sometimes there isn't another source. There is a huge market for loans to companies that have been around, but do not have enough creditworthiness to hit the banks. | |
Actionbsns (talk|edits) said: | 30 November 2007 |
| Thanks everyone, it always helps your self confidence when people like you agree with me. Unfortunately for the client, this is a done deal, he has his money and has most likely spent a lot of it by now. I think this is one of those life's lessons people learn the hard way. I have a meeting with him Monday for some other reasons and my advice is most definitely to not do this again and get out of it and away from these people as quickly as he can. | |
| 30 November 2007 | |
| This huge of a discount would only work for a service-based business like ours, where the owner did most of the work. Even in a restaurant, the food cost would be 1/3, labor cost 1/3, leaving only 1/3 for overhead and profit. If the owner 'factored' his credit card receivables, or whatever they are calling this, and received 69% of his money (54,017 divided by 78,324), then this leaves absolutely nothing toward overhead (rent, utilities, etc). The taxpayer would be digging a deeper hole everytime he did this. | |
| November 30, 2007 | |
| And there are actually other more reputable factoring companies out there that charge about 6%. | |
| 30 November 2007 | |
| Really? Do you have links to them? Because I have some clients that could utilize them. At a respectable interest rate, the cash flow that becomes available to these small businesses can really help them. | |
| November 30, 2007 | |
| I'm sorry, I don't have links. I'll see if I can get the name of one of them. | |
| 30 November 2007 | |
| Just put "factoring credit card receivables" in Google and you'll get bunches of them. Of course, they may all be crooks. | |
Bottom Line (talk|edits) said: | 1 December 2007 |
| When I was in the commercial banking biz, we compared factoring to drugs. Once you're on it, it's murder to get off it. | |
TravelerNY (talk|edits) said: | 9 March 2008 |
| There is a more reasonable company. Check out American Microloan. They typically charge $1,200 for every $10k borrowed over 6 month. I have put many of my restaurant customers, and they are all very happy with the financing and their service. | |
TravelerNY (talk|edits) said: | 9 March 2008 |
| There is a more reasonable company. Check out American Microloan. They typically charge $1,200 for every $10k borrowed over 6 month. I have put many of my restaurant customers, and they are all very happy with the financing and their service. | |
TravelerNY (talk|edits) said: | 9 March 2008 |
| Usury applise to business as well in most states. These advance company's transaction would be usurious if they were loans. That's why they disguise it as purchase of future sales at discount. It would be intereting to see if this "device" gets tested in the court. One of these companies got nailed in CA in '06. | |
| 9 April 2008 | |
| Spotlight Financial LLC offers a fast cash business loan with payback rates are as low as $0.07 on the dollar for a six month payback. The credit card processing account is reviewed to check cash flow but the loan is not tied to future credit card sales. This loan is a little bit harder to get approved for then a merchant cash advance but still much easier then a traditional bank loan. Here is the link: [1] | |
Jeremy Lee (talk|edits) said: | 18 August 2008 |
| The simple truth of all of this is that most of the businesses that turn to a cash advance company CANNOT get money from anywhere else, they usually have horrible credit, credit cards are maxed, their behind on their rent and utilities, they are barely making it. There are cash advance companies that take advantage of this situation and give the business owner money and then the cash advance company never talks to them again unless they default. However there are companies out there that stick around and help the business owner to succeed and to use the money to grow there sales and profits. If the business is smart about it and they use the money properly they wont have to come back to another cash company. I have seen this type of funding save business owners livelyhood. Is there nightmare situations out there? Yes! Are there companies out there that have the mindset to help people? YES!! I work for a company that does just that, is our money expensive? Yes! do we help people? Yes! It really makes me sad that there are cash advance companies out there that give guys like me a bad name. I am an honest person and i do this to be of service to people, it is a benefit for me to make money at it, but the facts are i dont make a lot of money. I barely make it, I drive a 6 year old car, I dont own a home, and I have bad credit. But I get to help people everyday. Thats the benefit for me. If you know someone that i can help then please send them my way, jlee@bfswest.com. | |
| 29 October 2008 | |
| I have a client who just got money from AdvanceMe, Inc. (of course without discussing with me first). I am at a loss as to how to book this transaction on his corporate books. The money he received was approx 15,000 and the credit card sales he sold is approx 20,000. The 20,000 will get paid back with 20% of each credit card transaction until paid off. Is the 5,000 difference in the credit card sales sold and the money received considered a loss of some sort? On their website, they insist this is not a loan but a sale of future credit card receivables. Should I debit Cash in Bank 15,000, credit Loan Payable 20,000, and debit Loss on Sale of Receivables 5,000? I thought of maybe setting it up as a loan of 15,000 and then record each 20% payment as a loan repayment, but without a definite ending date there is no way for me to calculate the interest? How have any of you handled these transactions? | |
| 29 October 2008 | |
| The reality of the situation is that the $5,000 is interest. You could do it any number of ways, but since it's a short term payback period, any reasonable method works.
If it was me, credit loan payable 20,000 debit cash $15,000 debit prepaid interest 5,000 then as they pay back the loan, use straight interst calculation to record interest expense. not 100% perfect, but it is close enough. For every $1.33 paid back. $1.00 is principal and $.33 is interest. | |
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