By Deborah L. Cohen

Fri 18 July 2008

CHICAGO ( — When getting a loan from the bank gets tight, as in these times, small businesses look for alternatives. Some are turning to a relatively young and unregulated industry known as merchant cash advances for funds.

The practice can be a lifeline for a small business to cover their costs in the near-term. But the trend is making some who watch over the health of small businesses in their communities nervous.

“We are seeing more demand for our funding across a range of different types of businesses than we’ve ever seen before,” says Glenn Goldman, chief executive of Kennesaw, Georgia-based AdvanceMe Inc., at 10 years old among the more established providers in the MCA industry.

“A lot of the reason behind the high demand is the fact that banks and traditional lenders have tightened up their lending or have completely abandoned market segments to such a magnitude,” he says. “The fundamental need for capital has not diminished but the source of that capital has.”

AdvanceMe and related MCA financing firms make money by agreeing to purchase a portion of a business’s future credit card receivables at a hefty discount, a rate that is calculated based on the historical performance and health of the business. The business is fronted a lump sum and the financing company begins to collect a percentage of its daily credit card receipts until the full amount is paid off.

For instance, a financing company might pay a retailer $20,000 today for the right to collect $28,000 in his future credit card receivables at a fixed daily collection rate of 10 percent. The financing company partners with a big credit card processor such as First Data Corp. and collects the percentage from the retailer each day when credit card transactions are processed.

Unlike banks loans, there are no closing costs or upfront fees. MCA providers typically give more weight to the underlying performance of a business than the owner’s personal credit scores. They say they can often process an advance in less than two weeks.

Not easy money

The money is expensive – often costing up to 30 percent or more of the original advance due to the high degree of risk. It is unsecured and there is no collateral. The daily repayment ebbs and flows with the retailer’s overall credit card sales.

“It’s paid when it’s paid. I don’t have to meet a deadline,” says Teresa McClung, who along with her husband owns Lawton Floral West in Lawton, Oklahoma. She took a $10,000 advance in March with Bethesda, Maryland-based RapidAdvance to purchase merchandise and pay off some outstanding debts. In total, the cash is costing $14,000 at a payback rate of 24 percent of her business’s credit card transactions.

“I’m probably spending more money than I would on a conventional bank loan, but I don’t miss it,” says McClung, who estimates that some 75 to 80 percent of her sales come from credit cards. “It comes out whether I have a $25-dollar day or a $2,500-dollar day.”

Financial experts and others with interests tied to the small business community have mixed feelings about MCAs. Because the industry is unregulated, some are concerned about predatory practices and caution that struggling businesses turn to these providers – who are estimated to approve more than 80 percent of applications – for financing of last resort. The U.S. Conference of Mayors in June went so far as to denounce MCAs as “usurious” and called for increased education. (

“Business owners need to be aware of the very high price of merchant cash advances,” says Mitch Jacobs, founder and CEO of On Deck Capital, which provides unsecured small business loans to companies denied by traditional banks. “Many businesses would prefer to see a fixed amount withdrawn, making it much easier to track their loan pay-down and reconcile on a monthly basis.”

Others believe MCAs can be a good tool for some companies; among the most suited are seasonal businesses such as restaurants in resort areas or retailers that bring in the bulk of their sales around the holidays.

“If you know you have cash coming in the door, it’s a good way to get cash up front,” says Jennifer Foster, whose Westfield, Indiana-based consulting firm, Foster Results, handles book-keeping and related accounting services for a host of small businesses. “It’s just like any other money that you borrow – you have to be smart with it.”

Indeed, the trick to using these products responsibly is to use them with caution – and to be certain you can afford the terms. Scrutinize the contract to ensure that the payback percentage remains fixed; check with a few customers, past and present, before signing the paperwork.

Karen Zebulon, owner of Gumbo, a women’s and children’s boutique in Brooklyn, New York, says she’s had good and bad experiences with MCAs. She says she is pleased with her current provider, AdvanceMe, which is taking 12 percent of her daily credit card sales against a $7,000 advance.

In the past she struggled with an MCA provider that changed its terms midway through the payback period, directly drawing funds from her bank account. She says credit card processor from that prior agreement is still charging her a monthly fee, even though her business no longer uses its services.

“I think people that are just coming into it – they really need to do their research,” she says.

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