Saturday, September 8, 2007

Subprime Mortgage Bust And Its Affect On The Merchant Cash Advance Industry

There isn't a newspaper, magazine or TV show these days you can turn to that isn't talking about the subprime mortgage bust. In fact, even President Bush has had to step in to assist in this national dilemma. Many people have been asking how will this credit crunch affect the merchant cash advance industry? My opinion is that it will actually increase the demand for a credit card factoring product such as the merchant cash advance. Traditional banks and other lending sources have already started to tighten up their already rigid underwriting criteria. In addition, many business owners in the past have used the equity in the house to refinance to obtain working capital for their business. With the refinance industry drying up coupled with the tightening of banks underwriting criteria will only attribute to an increase in market demand for the merchant cash advance for the foreseeable future.

There are also many positive attributes about the merchant cash advance product that can assist and/or correct someone that may have had a subprime mortgage or loan. Here are a couple of attributes that a merchant cash advance has that is more favorable than what a subprime mortgage or loan was:

  • Documentation - there are reports that homeowners were able to get a subprime mortgage or loan with little or no documentation, employment verification, etc. A merchant cash advance is just the opposite. Any reputable merchant cash provider should be doing due diligence on the merchant which includes various document (proof of ownership among other things) and business income verification (the merchant's credit card processing statements).

  • No closing costs of fees - many subprime mortgage or loan brokers were charging extremely high upfront closing costs and fees. Any reputable merchant cash advance provider should be charging NO CLOSING COSTS. Any merchant that is even considering paying a merchant cash advance provider a closing cost should RUN from that provider. There are plenty of merchant cash advance providers that don't charge a closing cost.

  • No surprises in the payback - part of the cause of the subprime mortgage bust is many people entered into Adjustable Rate Mortgages (ARM). These programs typically started off at a lower "teaser" rate and readjusted to a higher rate in most cases anywhere from a year to a few years later. A merchant cash advance has a fixed percentage of a merchant's future credit cards sales that is paid back over the course of the program whose percentage should never adjust.

I think the subprime mortgage bust is an opportunity for the merchant cash advance providers and their sales channels to responsibly introduce this product to people that previously may not have consider it.

And I think the merchant cash advance industry can learn from the mistakes of the subprime mortgage industry by not taking advantage of the customer with upfront fees and being responsible in their underwriting practices.

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