NEW YORK (TheStreet) -- The increased use of merchant cash advances by small businesses is an expensive reality of the post-recession credit fallout.
Merchant cash advances are financing transactions increasingly being used by small retailers and restaurants -- generally those that have high credit-card and debit-card volume. Cash-advance companies provide working capital funds in exchange for a portion of future credit card receivables. The lump sum, usually given within a few days, does not require personal guarantees or collateral like bank loans do, but they carry short terms and high rates. Plus, if a business starts to fall behind on payments (which are collected via remittance of sales), you can be sure that the lender will quickly look for its money.
"The smaller the business, the more likely [it's] going to have to use these alternative forms of capital -- the smallest hairdresser might need to rely on a cash advance," says Dun and Bradstreet Credibility CEO Jeff Stibel. "If you're going to go down the route of a high-interest, short-term loan, do your homework. Find the best terms with the most reputable companies and focus efforts there."
Even in the best of times, it was difficult for a small business to get a bank loan, so companies, especially startups, have had to resort to any combination of ways to get financing, including personal savings, credit cards and other types of so-called alternative lending.According to the latest Biz2Credit Small Business Lending Index, the use of alternative lenders, which includes accounts-receivable financers, merchant cash-advance lenders, Community Development Financial Institutions (CDFI), micro lenders and others, continues to rise. In September, the group approved two-thirds of the applications they reviewed, the highest recorded since Biz2Credit started the index in 2011. "Alternative lenders offer greater flexibility, quicker approvals, and competitive lending rates than they ever have before. This type of financing is very helpful for small and mid-size businesses that encounter short-term cash-flow issues," Biz2Credit co-founder Rohit Arora said in a statement. "Restaurants and retailers, in particular, find this type of financing attractive as they look to the fourth quarter to be more profitable than other parts of the year. Many businesses are seeking short-term working capital to prepare for the upcoming holiday season," Arora says.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV