If a wholesaler's customers uses merchant cash financing (MCA), beware.

Most state laws protect bev/al wholesalers against the dangers of merchant cash advance financing by requiring either cash on delivery or complete payment monthly. But still, if you're not aware of this financing racket, you should be. If one of your customers is

Restaurant Business reports a 43-location Subway franchisee has filed for Chapter 11 bankruptcy protection. The court documents themselves suggest to us that the franchisee was severely under capitalized: It reportedly had $500,000 to $1 million in assets and $1 million to $10 million in liabilities.

The liabilities included $2.3 million in outstanding loans, including equipment leases, various other loans and $761,000 in SBA loans. And it owes $1.4 million to two merchant cash advance lenders. One carries an interest rate of 59.39%, the other 94.54%. These are loan-shark rates, but perfectly legal.

One of the lenders, Ocean Funding, put several liens on MTF's revenue collection from Square, Stripe and American Express late last year.

“The continued cash drain caused by the weekly and daily draws has been the primary cause of [MTF’s] financial problems,” Michael Fay, CEO of MTF, said in a court document.

MCAs are a growing business, partially because getting a traditional bank loan can be difficult with lengthy approval processes, stringent credit requirements and high interest rates – although we doubt any regular bank charges 60% to 90% a year. Repayments are tied directly to credit card transactions. Every day, the MCA lender takes part or all of a merchant's credit card transactions. The high cost of borrowing and daily repayment obligations can quickly become overwhelming.

Contrast this with how one of the nation's largest off-premise retailers built its business. From its beginning, Total Wine & Spirits adopted a practice of not opening a new store until the last store was profitable. This enabled it to avoid the sort of disaster that faced MTF Enterprises.

The old adage of "slow and steady wins the race" applies here. Assuming MTF's assets totaled $1 million – the upper range of what it admitted on its bankruptcy filing – each individual location was backed by $23,255. That's not enough to cover any one location's payroll.