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o doubt about it: times are tough, and a typical $100,000. The MCA hands him the cash today to
small business owner, scrambling to survive, create a successful eatery; he agrees to pay back
might consider an unconventional loan—even $135,000 in future credit card sales.
if that means metaphorically eating its own tail.
Theoretically, this deal would be completed in six
Merchant Cash Advance (MCA) shops will lend months, at the rate of $22,500 per month which,
money with alacrity to a business with poor if annualized, works out to a staggering 82%.
credit, which might make them attractive to a Compare this with the typical credit card rates of
struggling entrepreneur. The catch? MCAs take it 14% to 25% and you get a sense of just how juicy
out of your hide: they loan cash in exchange for a the MCA business can be for these non-traditional
percentage of future credit card sales, which, on lenders.
an annualized basis, tends to run as high as 70%
to 90%. Yikes! Since MCA transactions are not loans, they’re
exempt from usury laws. Instead, MCA owners
Yet, in the wake of the current credit crisis, see themselves as “equity partners,” sharing the
business is booming for these lenders of last risk (and hefty rewards) just as a venture capitalist
resort. With traditional lending sources as would.
parched as the Sahara, MCAs have witnessed an
unprecedented surge. So much so, in fact, that Of course, in light of the slowdown, even MCAs
hedge funds are eager to get a piece of the pie. are rethinking their lending models in order to
stem defaults and ensure timely repayment. For
What makes MCAs unique? Unlike loans, which example, some will not lend money to companies
borrowers repay at a fixed percentage for a in the housing market or in any field related to it,
predetermined time period, merchant cash such as carpet or appliance stores. And many MCA
advances target a specific repayment amount, shops require their customers to use the same
which can be collected for as long as it takes to be third-party credit card processors that they use.
paid in full. A deal is typically structured so that
the MCA gets it investment back, along with a So is borrowing from an MCA worth the risk for
substantial profit, in six to nine months, although your business? If you have a strong gambling
the rough economy has lengthened some streak, and unshakeable confidence in your future
payment cycles to ten months or more. success, perhaps it is. But it’s somewhat like doing
business with a vampire: a huge blood loss before
Here’s a typical example of how an MCA your company can struggle back to life.
transaction would work. Suppose the owner
of a promising Italian restaurant needs to raise
Adapted from Look Who’s Making Coin Off The Credit Crisis by
Maureen Farrell on
April 2009 
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