The merchant cash advance industry has thrived during this economic downturn.  Companies hit dry spells and need a quick influx of cash.  Crappy economy or not, equipment still breaks, roofs still leak, and employees still need to be paid.  If you have steady credit card sales, but do not want to deal with banks (or have poor credit) a merchant cash advance may be your ticket out.  Like loans of all types, though, there are risks involved, and the interest rate of a cash advance will be much higher than that of a traditional bank loan.

Merchant cash advances work by averaging your credit card sales over a specified amount of time (varies by company) and advance you a percentage of your future expected credit card sales.  The advance is repaid as a percentage of these future credit card sales.

Two immediate advantages are the lack of a credit check and almost immediate cash.  If banks won't lend you money, this is the best route to take.  The turnaround for some of the factoring companies is as fast as 24 hours for your money (great for equipment replacement).

Let's look at some situations where a merchant cash advance is a good idea, and some where they are not.

The obvious benefits of a merchant cash advance (see above) can make them very appealing. Your businesses conditions need to be "right" for this to make sense. Consider bank loans first, and if this isn't an option, it's time to look at factoring and credit card advances.

The best situation is when you expect an upswing in business during the repayment timeframe. This will make the monthly payment painless. For most businesses, an increase in sales is hard to predict, but for seasonal business it's not. If you run a restaurant that has had a rough winter, but you know that the conditions are right for a great summer, consider a cash advance.

Equipment failure is another situation that a merchant cash advance makes sense. You need the equipment to operate, and you need the cash to buy/repair it immediately. If your business can't operate without it, look into cash advances.

More often than not, a merchant cash advance is a bad idea. The interest rate is too high. A bad idea can that get you out of a crappy situation. When faced with choosing between two evils, high interest or closing your business, all business owners will take the high interest to keep their stores operating. There are some times, however, when you shouldn't consider cash advances.

If you can't predict an upswing in sales any time in the near future, this probably isn't a good idea. Or, even worse, you see sales declining in the future. You'll have to stop accepting cash just to cover paying back your advance!

Some cash advance companies have strong legal recourse if you can't pay back the amount. Before accepting the advance, be sure to know what that is!

Don't offer your personal assets as a guarantee for the advance!  Seriously.

Let them wreak havoc on your business, not you, if the advance can't be repaid.  Save those big bets for the banks.  If that's a part of their terms, find a different company.