State Regulators Are Destroying a Lifeline for Small Businesses
by Rusty Weiss
Nov 27, 2018 | 598 views | 0 0 comments | 35 35 recommendations | email to a friend | print
Running a business is a blood sport. Just half survive their first five years; only one in three makes it to year ten.

When disaster strikes - sales dip, equipment breaks - most small businesses have no choice but to close. They're running on razor-thin profit margins as it is, and most have little savings.

Thankfully, there are new service providers catering to small businesses. These providers offer "merchant capital" or, essentially, cash advances on future earnings. The advances have helped thousands of small firms in times of need.

But across the country, some powerful lawmakers are campaigning to squash this industry. Their efforts would destroy this lifeline.

Banks have always been wary of small businesses. Such loans tend to be much riskier than loans to larger companies. The 2008 financial crisis made banks even more risk averse: bank loans to small businesses are down about 20 percent since the crash.

Most small businesses are in a financially precarious position. Even if they're making a profit, few have enough savings to absorb unexpected costs. Say a food truck's broiler breaks or a small law practice loses a major client. To whom can these owners turn for cash?

Enter merchant capital. Here's how it works: the provider evaluates the business's expected revenues to determine the size of the advance.

Most merchant capital firms don't consider credit history. For many small businesses, that would be a deal-killer; they had to load up on debt in their early growth stages.

Providers don't require collateral, just a "performance guarantee" legally committing the owner to try her best to pay back the advance.

Merchant advances are repaid through automatic deductions from a firm's sales. Providers tie re-payments to performance - they're lower when sales are down and higher when sales are up.

Since merchant capital firms are exposing themselves to the possibility that the small business won't hit its revenue projections, advances come with higher prices than traditional loans. But most businesses are glad to pay them. The quick cash is a godsend.

Some state lawmakers have failed to appreciate this calculus and remain convinced that merchant capital is too expensive. Several are trying squash the industry entirely.

Governor Andrew Cuomo, for example, silently slipped a provision into his newest budget proposal ratcheting up controls on merchant capital firms, including expensive licensing requirements.

The California state legislature just passed untested rules restricting industry marketing.

These bills would saddle merchant capital providers with excessive costs and drive many out of business.

Small businesses are the backbone of the economy, employing nearly half the private sector workforce and creating about two in three new jobs.

But these businesses are also fragile. They need options for quick cash. These misguided regulations would doom them to bankruptcy.

Rusty Weiss is editor of The Mental Recession and small business owner in East Greenbush, New York.
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