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.
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