Friday, December 28, 2007

2008 Merchant Cash Advance Industry Predictions

As promised in my last article, the Merchant Cash Advance Year In Review, here are some predicitions for 2008.

1) Underwriting will tighten up / approval rates will go down - Many merchant cash advance providers have seen their share of bad debt this year. For a merchant funding company, it's no secret that no matter how much money you fund each month it's irrelevant if your bad debt eliminates all your profits (or even worse puts a merchant funding company into a loss). Too many companies tried to capture marketshare / attract new agents by funding deals whose industry doesn't work for this product, gave a merchant too much money then they should qualify for and were naive to identify merchant fraud. In 2008 you will see for the first time industries that NO merchant cash advance funding company will touch rather than the select few who were willing to take the risk in 2007 on high risk industries and they suffered the consequences.

2) Sales Agent Commissions will stabilize and/or decrease - 2007 was a bidding war between merchant cash advance companies to attract new sales agents / ISOs to resell their product. Many cash advance companies were new to the industry and haven't had the experience yet to understand the full profitability of the business. After factoring in the bad debt associated with the product and the quality of deals submitted by certain agents / ISOs, many merchant cash advance companies have come to the conclusion they can't make money by paying the ISO commissions they were paying. Many have already started to lower commissions or changed the pricing to the merchant to offset the higher commission. Some merchant cash advance providers have even terminated relationships with various agents / ISOs because they couldn't make money on the relationship. All the above factors I believe will lead to stablizied / lower commissions in 2008.

3) Self Regulation - The industry has grown to large and has too many providers to not have best practices / industry standards in place. In 2008, I believe you will see a group of the key merchant cash industry players come together to announce a set of best practices for not only the merchant, but practices to protect the merchant cash advance providers as well. In my opinion, the amount of fraud committed against the merchant cash advance providers by unscrupulous merchants and sales agents far exceeds the amount of unethicial practices that may have taken place by certain sales agents to merchants (no different then the problem that has existed for years of sales agents taking advantage of merchants when selling credit card processing services).

4) Mergers & Acquisitions - In 2008 I believe we will see the first major merger and/or aquisiton in the merchant cash advance industry. It will most likely come in the following form: 1) Merchant cash advance providers who run out of money will most likely be swallowed up by another merchant funding company. 2) You will see larger financial institutions looking to enter the merchant cash advance space. I believe you will see an outright acquisition of a merchant cash advance provider or a strategic investment in one by a larger player. 3) Two mid-size merchant cash advance providers merging together to become a larger player in the space.

All in all, I think 2008 will be a very positive year for the merchant cash advance industry. Demand for the product will continue to grow, especially with the recent credit crunch. Everything I mentioned above in some cases may be short term hiccups (e.g., harder for agents to get deals approved), but in the long term it will be more beneficial for the sales agent / ISO and the merchant cash advance industry to ensure this is a viable, long term career for all.

I wish everyone a happy, healthy and prosperous 2008.


Sunday, December 16, 2007

The Merchant Cash Advance Year In Review

It's hard to believe 2007 is almost over. 2007 was one of the most important years in the merchant cash advance industry. There were several stories and events that happened in our industry, here is a recap:

The biggest news of the year by far was the invalidation of the AdvanceMe patent. This blatently obvious patent which was practiced by others for many years before it was filed by AdvanceMe was not only the cover story of several industry publications including The Green Sheet and ISO & Agent Weekly but it was a featured 1/2 page story in The New York Times and The International Herald. If this patent was not invalidated, we could have seen the end to fair competition in the merchant cash advance space.

Another big story of 2007 in the merchant funding sector coincides with the meltdown of another industry, the subprime mortgage market. Since 1000s of subprime mortgage brokers are unable to earn the same income they were previously, many have migrated into the merchant cash advance space as reported in September this year in the merchant cash advance blog entry, Invasion of the Subprime Mortgage Brokers. I believe those former subprime mortgage brokers that were looking to make a quick buck realized like any business, it takes time, money and morale to earn a good living. Those that entered were lured with high hopes and promises that turned into reality - meaning that "bad deals" aren't getting approved and the commissions aren't as high as they were led to believe. We are starting to see an exodus already of several of these brokers who can't find a funding company to still work with them after a couple of months because the bad debt on their paper is so high. Those mortgage brokers that are taking the long term approach, selling this product properly and not looking to make a quick buck should do alright in the long run.

While 2007 saw many funding companies popping up in 2007 (at some point it seemed like that there were more merchant cash advance companies popping up than there were Starbucks or McDonalds), we also started to see some merchant funding companies leaving the industry in 2007. In addition, there are rumors circulating on a monthly basis of some credit card factoring companies running into challenges with their lenders / investors to the point that they have to limit the dollar size and/or the monthly volume of deals they can fund. There is no doubt in my mind that in 2008 you will see mergers and aquisitions within the merchant cash advance industry as well as some companies simply closing their doors.

Another top story for 2007 (especially the second half of the year) is the tightening up of approval rates by various merchant cash advance companies. It's not secret that if you are going to pay large commissions to buy marketshare (which you can only do for so long) and your bad debt is not at a controlable rate, it's a recipe for disaster. Several new MCA providers tried to buy marketshare in 2007 by paying large commissions to ISOs / agents to later either reduce the commissions, terminate the relationship with various sales agents and/or tighten up extensively on the types of deals they will fund. Just like credit card processing there will soon be business types that are virtually impossible to get approved for a merchant advance.

Last but not least, 2007 was the birth of the Merchant Cash Advance Blog. I have received 100s of emails since inception thanking me for taking the time to publish this resource. The daily traffic to this blog increases from month to month. I hope its content has been helpful since I started writing this blog on the merchant cash advance industry and as always I'm open to suggestions / comments for additional topics.

I would like to wish everyone a happy holiday and the next blog entry, predictions for 2008, stay tuned...

Wednesday, December 12, 2007

Merchant Cash Advance - EAR - Effective Approval Rate

Merchant Cash Advance sales people have always been very focused on what the commission is their merchant funding company is paying them. What most fail to realize it's not what your sales commission in your contract reads but your effective approval rate (EAR). Some merchant cash advance companies will offer teaser commission rates to get you on board and then you will soon realize they are approving 20 - 25% less deals then most and/or giving merchant's 20-25% less funding compared to other companies. Since commissions are typically based on the payback amount of a merchant cash advance, you can see how this can greatly vary and affect your overall commissions earn. In some cases, your actual commission rate may be up to 20 - 25% less than you think it might be based on these two factors.

Next article, the Merchant Cash Advance Industry - 2007 The Year in Review and Predictions for 2008.

Saturday, December 1, 2007

Merchant Cash Advance Industry Affected By The Subprime Mortgage Bust?

Many people have been asking me if the merchant cash advance industry has been affected by the recent subprime mortgage bust. We have found both a positive and negative scenario within the merchant cash advance industry. The negative thus far has been much poorer quality applicants for a merchant cash advance that we are unable to provide funding for (e.g., many people whose houses are being foreclosed on). The positive effect has been that we are also seeing some better quality applicants who in the past might have used traditional financing such as tapping into the equity in their home to help fund their business or a straight business loan from a bank. With the recent credit crunch and the decrease in real estate value in many areas of the country, many business owners are no longer able to use their home equity as a source of working capital for their business. It will be interesting to see if the positive is outweighing the negative for merchant fundings.