Short-term financing known as merchant cash advances are getting some small businesses into hot water financially

Marketed as a fast way to access cash, merchant cash advances can help some entrepreneurs get out of a tough spot — but consumer advocates and government officials say that too often, that’s not the case.

Here’s how they work: Typically offered by credit card processing companies, a merchant cash advance is a lump sum of cash taken out as an advance on a borrower’s future sales. Typically, the borrower then pays back this balance — plus a hefty premium — through automatic deductions of their daily credit card or debit card sales or from the business’ bank account.

Terry Baggett, an African-American entrepreneur who owns Chicago-Springfield Insurance in the city’s Humbolt Park neighborhood, where his family has operated for 50 years, took out a $12,000 merchant cash advance for the first time last year

Woodstock Institute, a nonprofit research organization, analyzed a number of merchant cash advances and found that borrowers often end up paying effective interest rates that can soar into the triple-digit percentages. Read more