Making $$$ Off The Credit Crisis

Forbes:

When credit gets tight, the vampires come out.

Now feasting on small businesses is a cadre of “merchant cash advance” (MCA) shops. These lenders of last resort–which started popping up after the tech crash in 2001–give small businesses cash today in return for a percentage of their future credit card sales. Annualized cost of that precious capital: in the neighborhood of 70% to 90%.

Usurious as that sounds, the MCA business is booming. These lenders typically attract entrepreneurs with tattered credit ratings, but with money tight all over, the quality of MCA borrowers is on the rise.

“In the past three months, we’ve been working with customers that would have had other means in the past,” says Tim Irish, owner of Chula Vista, Calif.-based Global Swift Funding. “They’ve been coming to us because [traditional lending] sources have dried up.”

Here’s what all the fuss is about: Unlike a loan–which comes with a fixed coupon over a set period of time–MCA transactions involve a target repayment amount, collected over as long a time period as necessary until it’s paid off.

The deals are typically structured so that, based on a small business’ past performance, the MCA shop get its money back–plus a handsome return–in six to nine months. If sales ebb, the payoff could take longer than expected. If they spike, the MCA shop collects its money faster, allowing it to put that cash to work on another deal, juicing the already juicy returns on its capital.

Photo by yirsh.

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