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How to Vet a Merchant Cash Advance Provider

Advance providers say they're doing more to self-regulate, but a merchant's best protection is to understand the terms of the contract before signing up

If you're considering a merchant cash advance for your business, how can you evaluate the provider? Even the largest providers, who say cash advances have gotten a bad rap, concede that some companies or independent brokers have been too eager to sign up merchants who aren't a good fit for the product. Cash advances remain a niche product, but some analysts say the industry is growing by double digits and could reach $10 billion in advances. Business owners should understand the risks before signing up.

Advance providers offer small business owners up-front payments in exchange for the right to collect a portion of their future credit-card sales. The quick, unsecured funds come at a high price: providers typically charge premiums of 30% or more of the amount advanced and collect it in a matter of months. They usually sell to retail, restaurant, and service companies with high credit-card volume, and because the advances get paid off as a set percentage of credit-card sales, merchants repay less in slow months—a flexibility providers say is a key selling point. Cash advance providers say they offer capital to companies that banks won't lend to, and that advances are expensive compared to loans because they assume the risk that a business may go under or not repay as quickly as expected.