With almost all businesses on a retail level accepting credit cards, the upswing in cash advance lenders was probably inevitable. Because business lines of credit have been severely restricted or completely canceled for many retail businesses, retailers and small business people alike have been scrambling during the downturn to find the working capital they need to keep the doors open while they ride out the storm.
Merchant advance companies have been more the happy to step up and provide this capital. These “cash advances” are given by credit card payment processing companies based on future credit card receipts. As unregulated loans(technically advances against future earnings) there is no maximum interest rate that can be charged, as state usury laws do not apply. Merchant cash advance companies can also change their interest rate at any time during repayment.
Many times, merchant advances can have effective interest rates as high as 50%. Additionally, in this fiercely competitive market, many companies will force a retailer to switch credit card processors as a condition of funding the advance, or they may require them to purchase new equipment and pay high upfront fees. However, as the lender of last resort, they know that they have an eager customer base that is just eager to accept any type of funds to ensure survival.
Merchant advance lenders often will argue that these difficult terms are justified by the fact they are accepting a high level of risk in these types of loans. While there may be some truth to this, there is now a new way to get this type of working capital funding with interest rates that are dramatically lower, have no upfront fees, and no requirement to switch card processors or buy equipment
Today’s retailers need a better way to access capital outside of a bank than what cash advance lenders are offering. A business needs a leg up, not a huge burden that can end up driving them out of business. To find out more about this new low cost alternative to merchant cash advances, click here.
Neal Coxworth is an entrepreneur and a 17 year veteran of the consumer credit industry with experience in originating, underwriting and processing mortgage, student and consumer credit loans.