Telling a profit story about cash advance requires special skills to paint a picture! If you’re wondering what a cash advance is, I’ll take a minute to explain. Factoring is an age-old concept where someone with money will buy the future receivables of a business that needs money. For example, many companies sell products/services on net terms. This means they ship the product today and the buyer will have 30-60-90 days to pay. Companies in need of cash today and don’t have access to that cash elsewhere, would sell that net term contract at a discount. For example I sell you 100 credit card terminals at $100 each, with net 90 terms, so you owe me $10,000. Joe Factor buys that contract from me for $8500.00 in cash today and waits 90 days to collect the $10,000 from you.
So in our wonderful world someone came along and said that credit card sales are really just future receivables. For example, if a merchant processed $10,000 in credit card sales for the last six months in a row there’s a pretty good chance they’ll continue at that level for the next six months. So, if the merchant needs cash today for a project, we can just buy a portion of the next six months processing from that merchant at a discount. The payback ratio per dollar borrowed that a merchant would expect to pay back would range from $1.20 to $1.50. That means if the merchant were to get a $10,000 advance they would payback $12,000 to $15,000 over the approximate six month term. That money would be deducted directly from their credit card funding, before the merchant even sees it.
So why would anyone want to pay that much for money? Well, if you’re a small business owner getting money through traditional lenders can take an act of Congress. Here’s where telling the profit story comes in and why it’s a little tougher than telling a simple mathematical profit story for gift cards, checks or another service. With a cash advance you’re not selling the money, you’re selling what the merchant wants to do with the money. For example, there aren’t any smart people who will just want to take $10K today and pay you $13K in six months, unless they have a plan for the money that will earn them more than $3K in profit or result in a reduced hassle.
So the profit story is told by asking the questions that will allow you to paint that picture of profit or reduced hassles that will make it worth what the merchant will invest. The profit story is also apparent in the speed and ease with which the merchant can obtain cash compared to other maybe less expensive means. That’s how convenience stores can sell you a pack of gum or quart of milk for much more than you’d pay at the supermarket. “CONVENIENCE.” You can get people the money they need in a week or so with minimum documentation. You can get people the dream they’ve been putting off. That new bar. That advertising TV ad. That drive-through window. The sky’s the limit. Just be honest and help them see how they could be better off by acting and that it may cost them more to wait.
As with all newfound powers comes responsibility. People that need money can be vulnerable to people telling them what they want to hear. So don’t promise the world or tell them they need a new terminal or have to pay a big application fee to get an advance. You may make a commission but could very well put someone else out of business.
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