Providers of merchant cash advances say demand has increased for this type of financing as the recession has made traditional loans harder to come by.

However, because more merchants have encountered financial difficulties, some cash advance firms have tightened their underwriting criteria. Merchants that previously may have qualified for an advance no longer do. This has discouraged middlemen like independent sales organizations from marketing the advances, since they know their merchant customers are likelier to be turned down.

Cash advance companies purchase future card receivables to provide merchants with immediate funds, and they get repaid by taking a percentage of the retailers' credit card revenue.

A majority of merchant service providers — 56% — offer merchant cash advance services, according to a survey conducted by ISO&Agent. Forty-two percent of the respondents stated that 1% to 10% of their merchant clients use cash advances, while 47% stated none of their clients use them.

"I think there is more of a demand for products such as merchant cash advances in this particular market," said Adil Moussa, an analyst with the Boston consulting firm Aite Group LLC. "Some card networks and issuers have pulled the rug from small businesses by lowering their credit limits on cards or loans after the economy deteriorated."

Since the recession began, the merchant cash advance provider AdvanceMe Inc. of Kennesaw, Ga., has noticed an "uptick" in merchants looking for funding, said Mark Lorimer, its chief marketing officer.

"Since the banks have tightened [lending] during the credit crunch," some merchants "have looked hard to seek out more sources for financing," Lorimer said. "In the past, they may not have looked past their local bank."

Stephen Sheinbaum, the chief executive officer of Merchant Cash and Capital in New York, agreed that as credit lines became constricted, merchants "who never considered a cash advance before" began looking into it.

"We are undoubtedly seeing growth of the merchant cash advance in the recession," he said.

Neither Lorimer nor Sheinbaum provided data to support their observations.

A National Small Business Association survey released last month found small businesses relied more heavily on credit cards for business financing during the first four months of this year. About 59% of survey respondents said they used credit cards during the previous 12 months to finance their businesses, compared with 49% who said so in December. Roughly 33% of respondents said card issuers had reduced their credit limits in recent months, up from 28% who said so in December. The Washington trade group surveyed 288 of its members online between April 27 and May 5.

Henry Helgeson, the president and co-CEO of Merchant Warehouse, a Boston independent sales organization, said some merchants are having trouble repaying cash advances they took out before the recession began.

"Lots of merchant cash advance companies have taken hits and have not been able to get payback from merchants," he said.

In response, some cash advance companies have undergone a "major tightening of underwriting policies," Helgeson said. "They generally are less willing to give advances."

Merchant Cash and Capital has tightened its merchant criteria and is more selective about the retailers to which it advances funds, Sheinbaum said. "We raised the bar."

The company now speaks with a larger number of merchants' vendors to ensure they are in good financial standing, and it checks "to see if merchant processing volume has fallen off in the past few weeks," Sheinbaum said. Merchant Cash previously required processing volumes only from recent months.

Xavier Ayala, a vice president and the director of national sales and marketing at Humboldt Merchant Services in Eureka, Calif., said underwriting has tightened more in some places, such as Florida and Southern California, than others.

"I'm not saying companies won't take accounts from these areas, but I'm saying they will take a harder look at these specific areas" because merchant default rates have risen there, Ayala said.

Helgeson said that the harder it is to get a merchant approved for a cash advance, the less likely sales agents are to actively market this type of financing.

Sales reps at Merchant Warehouse "pretty much have stopped selling it at this time, because it's so hard to get someone approved," he said. Sales agents understand that customers' time is valuable "and they don't want to go in and get documentation and get declined."

Dane A. James, the executive vice president of corporate sales at Cynergy Data LLC, a processor and ISO in Long Island City, N.Y., said many agents fear that a merchant turned down for a cash advance may become unhappy overall with its service provider.

"They don't want to risk the core business we have" to try and get a merchant approved for a cash advance, James said. As a result, he said, "the salespeople are bringing the product up less and less."

Many of the merchants currently applying for cash advances are of the same quality as those that requested funding before the recession.

"We're seeing an increase in the volume of requests, but we're not seeing better merchants" with higher credit scores applying, Helgeson said.

James put it this way: the merchants requesting cash advances "are the ones with the worst possible type of credit, and they're getting declined by the cash advance provider."

However, some cash advance providers reported an increase in merchant quality.

"The quality of the merchant that we're giving money to today is substantially better than it was," Sheinbaum said. The decreased availability of credit lines from financial institutions and of corporate credit cards is leading some larger, more creditworthy merchants to consider cash advances, he said.

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