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Merchant Cash Advances Are Expensive Small Biz Lifeline

In this era of tight money, many small businesses feel that they've been hung out to dry by traditional lenders. . / Credit: Broken piggybank image via Shutterstock

In this era of tight money, many small businesses feel that they've been hung out to dry by traditional lenders, a new survey shows. As a result, a growing number of companies are turning to alternative sources of funding, such as merchant cash advances (MCA).  Though it's money that comes with a steep price, for many business owners it provides the cash infusion they need to stay in business or grow their business.

Many small businesses using merchant cash advances either didn't think they would qualify for financing from traditional lenders (42 percent) or had already been declined or withdrew their application (57 percent), according to a survey of its customers conducted by Merchant Cash and Capital (MCC), a provider of MCAs. 

The MCA funds were used for expansion and growth (32 percent), purchase of inventory (15 percent), followed by payroll, paying taxes/bills and marketing, the survey found.

[Where to Go When the Bank Says No: Ideas for Small Businesses]

Merchant cash advances are unsecured cash advances based upon a merchant's volume of credit card charges, Mark Lowenstein, Merchant Cash and Capital's (MCC) marketing director, told BusinessNewsDaily. Unlike a loan, there are no collateral requirements and no stipulation as to what the money will be used for. Funding decisions are generally made within three to four days.

MCC, for example, will advance an amount equal to between 100 percent and 200 percent of a company's monthly credit card volume from $2,500 up to $250,000, Lowenstein said.  To qualify for an MCA, a business must have a minimum monthly credit card volume of $5,000.

MCC collects between 10 percent and 45 percent of a business's daily credit card processing receipts until the advance is paid back, he said. Repayment programs typically run between six and 12 months. A seven-month payback at a rate of 33 percent, for example, would be the equivalent of an annual interest rate of 56 percent.

"Our customers on average take financing about three times," Lowenstein said. "A lot of businesses use it as bridge or gap financing."

While conceding that this is expensive financing, he points out that many businesses taking advantage of MCAs need funds quickly, have no relationship with a traditional lender or may be behind on payments.

"Every business has a story," Lowenstein said. "We actually listen to them. And we fund then based on that story."

Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.

Ned Smith

Ned was senior writer at Sweeney Vesty, an international consulting firm, and was Vice President of communications for iQuest Analytics. Before that, he has been a web editor and managed the Internet and intranet sites for Citizens Communications. He began his journalism career as a police reporter with the Roanoke (Va.) Times, and was managing editor of American Way magazine and senior editor of Us. He was a Captain in the U.S. Air Force and has a masters in journalism from the University of Arizona.