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AdvanceMe, Inc, has given small businesses a new way to raise funds—with loans based on future credit card sales. Sound like a gamble for lender and borrower alike? Read on...

Last year, Chad Obert was afraid he was going to have to shut down the four-year-old auto and truck repair business he ran in a small Midwestern town. He wasn’t concerned about his ability to tune up a Toyota, but Obert knew that he needed help fine-tuning his talents as a businessman. He believed that if he could learn some additional management skills, he could keep his enterprise open and running.

“I wanted to take a course on management and learn how to generate more clients,” says Obert, owner of Chad’s Auto and Light Truck Repair in Stoddard, Wisconsin. But coming up with the money was a problem. So instead of trying to borrow what a bank would consider a tiny amount of cash, Obert decided to try a relatively new method of raising short-term capital—tapping future credit card sales through an Atlanta-based company called AdvanceMe, Inc.

The mother of invention

Not yet a decade old, AdvanceMe is the brainchild of another small entrepreneur, Barbara Johnson. In the 1990s, Johnson was a young mother who owned a Gymboree franchise in a suburban Connecticut town. As her customer base grew, she needed some capital for additional equipment and advertising expenses. However, traditional lenders turned down her loan requests because of a perceived lack of business assets. Not one to be easily deterred, and confident that the increasing demand for Gymboree play time would mean a steady stream of new and returning customers, Johnson wondered if there was a way to leverage that future business into working capital.

After a bit of brainstorming, necessity turned out to be the mother of invention and spawned a new twist to an old form of financing—borrowing against future credit card receivables. While the idea of “factoring,” that is, selling existing accounts receivable to a third party to raise cash at a discounted rate for immediate needs, has been a financing tool that many businesses have used for decades, relying on future sales as a way to advance capital was untested.

Johnson then figured out that by incorporating into her plan the existing credit card processing system that almost all businesses have today, there could be a profitable way to tap into an under-served market.

Formula for success

What started out as an operation with a handful of employees in 1998 has grown exponentially in the last eight years, becoming a national presence with 200 employees generating $185 million in revenues, says Glenn Goldman, chief executive officer of AdvanceMe, Inc.

Goldman says advancing money on future credit card sales, as opposed to existing receivables, is not as much of a gamble as it may sound. The company has created a formula that looks at a variety of financial factors, including a business’s past credit card history and sales history, to come up with a picture of anticipated revenues. AdvanceMe then provides its customer a discounted amount of that projected total. So if a business expects to earn $10,000 in credit card sales over six to 12 months, it could expect an immediate advance on those receivables of about 75%.

“[A few years ago,] this type of financing was off the radar,” says Goldman, “but now it’s much more in the mainstream.”

One aspect of AdvanceMe’s services that business owner Obert found particularly appealing was not having to worry about missing timely payments—advances are paid back through the merchant’s existing credit card processing system. Each time a credit card sale is made, a small percentage of the transaction is processed and goes to AdvanceMe as partial repayment, allowing a business’s monthly payment to fluctuate with its revenues.

Until two or three years ago, close to 95% of AdvanceMe’s customers were restaurants, according to Goldman. But in recent years, other types of establishments needing short-term cash have found their way to this type of financing, including spas, salons, retail stores and small businesses like Obert’s.

While AdvanceMe is no longer the only player in the field of future credit card receivables financing, Goldman believes AdvanceMe is the largest, with about 60% of the market.

As for Obert, he says the decision to finance his small business education through AdvanceMe definitely paid off for him. Since completing his management training, he has been able to turn his revenues from $160,000 to $280,000—an increase of over 60% in just one year. Not too shabby for a small business that came close to shutting down for good.

For more information, visit www.advanceme.net

Words by Joanne Cronrath Bamberger

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