Since the beginning of 2011, banks have turned down 60 percent of applicants for small business loans in the United States. With the down economy, many small business owners face poor sales and are in dire need of capital. And, according to an article in The Wall Street Journal, many businesses that would have traditionally turned to banks – or have already been turned down by them – have instead sought funding from cash advance providers. In exchange for a certain amount of future sales (and hefty borrowing fees), cash advance providers are giving money to those who are willing to risk entrance into this highly unregulated market.
This lack of regulation, and high demand for capital, has produced about 40 significant cash advance companies (an exponential increase over the last 10 years). For leaders of small companies, this is an expensive but sometimes necessary source of capital.. Some CEOs have found the advances to be justifiable, and in the end the borrowing fee was outweighed by the return on this capital. The article quotes former CEO Ken Wisnefski, “We were getting turned away by just about every bank I approached, but within 14 days we got the working capital we needed.” And because of the capital Wisnefski received, his company was able to grow at a pace which allowed them to repay the $50,000 borrowing fee with ease.
And as the number of these alternative finance companies grows, the number of businesses that can benefit from their funds does as well. According to The Wall Street Journal article, one of the larger cash advance companies, AdvanceMe, has financed $2 billion to 40,000 companies since 1998. But, in this economy, AdvanceMe is rapidly growing and expects to jump to the $3 billion by 2013.
The practice of cash advances does have a reputation for being aggressive about receiving repayment, and in a questionable economy CEOs need to take this into consideration.
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