With lending tight, more entrepreneurs are turning to controversial "merchant cash advances"While most financial-services firms are floundering, those that specialize in so-called merchant cash advances are thriving. That's a mixed blessing for entrepreneurs who increasingly are turning to these sources for quick cash: Their money can come with a high price tag.
Like regular lenders, merchant cash firms dole out a lump sum. But rather than requiring that borrowers make a fixed payment at a specific interest rate, these companies collect a piece of a merchant's total credit-card sales each month—via the credit-card processing service—until they recoup the total amount plus a premium.
Merchant cash advances have been around for roughly a decade. But with big banks in full retreat from lending, more small business owners are seeking help from the likes of AdvanceMe, AmeriMerchant, and hundreds of other companies and independent contractors that offer such advances. The size of the industry jumped 50% in 2007, to around $700 million.
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