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.
You can read the entire article for more information. Basically it comes down to businesses not able to get funds the old fashioned way - lower interest bank loans - and are turning to the equivalent of a loan shark.
Running a business on borrowed funds is one thing but running an unsuccessful business on borrowed funds is another. These "merchant cash advances" charge really high interest (35% APR in some cases) because of higher default rates, but it may be better to take a long hard look and then throw in the towel.
Not everyone will be winners and in a down market the losers will be crushed with a cruel efficiency and those that remain will become stronger. These artificial finance lifelines will leverage a bad or ill timed business, creating a spectacular failure from what would otherwise be a mediocre unsuccessful business.
1 comment:
interesting. i heard it here first
Post a Comment