Behind on Rent? It May be Too Late to Obtain a Merchant Cash Advance

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There are numerous uses for a Merchant Cash Advance(MCA) but catching up on rent payments isn’t one of them. Growing a business can strain cash flow. Stretching out payment terms with vendors, overdraft charges, and pulling funds out of a personal account can tend to be part of normal operations. As long as this is ‘business as usual’, MCA Providers are readily available to provide funds.

Stretching out payments is one thing, but not making them at all is another. An underwriter shared this with us. “A restaurant in Arizona had been putting up consistent sales figures 6 months in a row, but they never had more than $100 in the business account. This would’ve been fine except they hadn’t paid their food supplier in 5 months. Before we could even make a decision on the account, the food supplier cut them off and filed suit against them. They had to close 3 days later.” There is a very clear line that defines what’s sustainable and what isn’t.

That particular MCA provider did not have a policy to conduct references with suppliers and had narrowly avoided what would’ve been an immediate default. When we mentioned that to the underwriter, he stated, “Well we do check to make sure they’re current on rent payments.”

That is one underwriting factor that is industry wide, the requirement to be current on business property rent payments. See… there’s a slight little issue that can impede a MCA provider from receiving their purchased sales, and that is if the business is kicked out by the landlord. Being current on payments isn’t scrutinized to the extreme, but rather put into the context of risk.

Making a payment on the 10th, when it was actually due on the 5th might make your landlord cranky but if you’ve been there long enough, there’s probably not any danger. Being one month late can also be accepted by an underwriter so long as the rent payment amount is not excessive. Tips from the underwriter, “If you pay $7,000 a month in rent and you are willing to take $6,000 in funding, we’re going to know most of that is going towards rent and wonder how you will be able to make the following month’s payment on your own.” On the other hand, some business owners have been at a certain location for so long or are so big, that being 30 days behind is business as usual. “If the business has been there 20 years and they make payments a month or two late every time, there really isn’t any indication of a negative situation. Also we’ve seen huge clubs that generate $400,000 a month but are sloppy with their books. These are the kind of businesses that will go 1-2 months without paying and then write out a check for the balance when they get around to it. It can freak out the landlord but as long as they bring in the cash, they’re not going anywhere.”

A general consensus in the industry is that being past due by 2 months and more enhances the risk significantly. Anyone can have a slow season or a bad month but there comes a point when the numbers stop making sense. If 2 months rent is $10,000 and a business sells $13,500 of their future sales today to obtain that $10,000, they’ll be caught up for now. But if the revenue being generated per month doesn’t increase, then they won’t be able to make the following month’s rent payment again. Therein lies the problem because not only is there another rent payment due but a percentage of their sales are going back to the MCA provider, amplifying the strain.

This isn’t to say that MCAs make problems worse, any type of funding would. You could give this same business a $10,000 loan with 0% interest payable in installments over 5 years and they would face the same dilemma. Unless sales improve significantly, there is nothing that can be done for them. Every business experiences a vulnerable phase but if it doesn’t make it over the hump, it’s probably time to call it quits.

Unfortunately, underwriters have encountered the late rent issue plenty of times in the past few years. These are businesses that were affected by the recession and have been on the decline for a long, long time. There are usually other factors that indicate financial stress by this point, such as poor credit. Our underwriting friend shared, “It’s tough to see that some businesses are 2 – 7 months behind on rent and are reaching out for anything at this point. If we approve them, we’re looking at a probable loss. We have applicants assume that since our funds are more expensive than a bank, we’ll pretty much tolerate any level of risk. That’s totally not the case at all. Unlike SBA loans, we have no government guarantees on defaults. We have to answer to private investors at the end of the day.

MCA providers are only interested in transactions where both parties benefit. Acquisition and overhead costs are so high, that their model only works if they forge long term relationships with clients. There are some simple ways to start this off: Use the funds to buy bulk orders of inventory, advertise, upgrade equipment, make repairs, hire new employees, or open a 2nd location. This is the model that has propelled Merchant Cash Advance to the forefront of the small business world. It’s easy, it’s fast, and it makes sense for both parties. But there is one way to ensure a long term relationship does not happen and that’s if the front door is padlocked. Behind on rent? It’s probably too late…

-The Merchant Cash Advance Resource

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Last modified: February 21, 2013
Sean Murray

Category: merchant cash advance, MPR Authored

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