Monday, March 17, 2008

Merchant Cash Advance Market Size - Part 2

There have been many debates as of late on what is the potential market size of the merchant cash advance industry. One item people have been debating is the saturation of the marketplace with the amount of new agents/resellers/ISOs and former mortgage brokers that are now reselling this product (There has been a decrease of new funding companies entering this space, especially those with any sizeable presence). I estimate the market size at a minimum is now $850 million annually in merchant cash advances that will be funded. Let's assume 60% of that number is first time deals which brings it down to $510 million annually, which breaks down to $42,500,000 month in new deals funded. (I actually think the number is probably closer to $50 mil a month). I like to look at it as the average funding size is around $22,000 industry wide, which amounts to a little under 2,300 merchants a month taking a merchant cash advance for the first time. That means on average there are 46 merchants per state per month taking a merchant cash advance. (I understand some states are larger / more populated than others). But, no matter what argument you want to make, I don't think we've hit the tip of the iceberg with this product as there is no way only 46 businesses per state per month need access to non-traditional working capital for their business. I believe that number can be increased at least 10 fold making this upwards of a ten billion dollar industry. The ten billion dollar question is how do you reach these merchants cost effectively?


Jgally said...

Been following this blog for a while now... as a sales manager for a newly formed ISO the last line really hit home!

Keep up the good work David! Great Blog!

Question: Do you think funders of advances will ever limit themselves to only working with companies with a MSP designation?

Anonymous said...


You are good at predictions, What can we expect from the ETA this year?

Anonymous said...

As more traditional lending sources dry up, there will in fact be more traffic to the cash advance. However, to think that the mindset of the bank oriented borrow will change in a matter of a month or two is unrealistic. I expect it will take until well into the 2Q 2008 before you see the flow of "upper tier" merchants in the other 90% turning to cash advance to support thier business financial needs.

Anonymous said...

too crowded right now with everyone fishing int he same pond. also, too many merchants defaulting and trying to get out of their advances quickly after they borrow. these advances seem to be a bandaid for many and not a solution. this industry is in its infancy alright, but, we have not seen what all of this will mean long term to business owners- Subprime Meltdown # 2?

Anonymous said...

My experience in cash advance has seen the vast majority of merchants who default are the merchants who were initially funded prior to mid 2007, and would never see the light of approval today (low batch counts, tax liens, industry types).

I mean, how can you take 20-25% of a gas stations' CC's? The owner only sees .05-.25 on the dollar after paying the supplier. OF COURSE he is going to default. Furniture stores usually do 75-80% of their business in cash anyway. Why wouldn't they divert payments to cash vs. cc's to avoid payment? The Federal government will go after a MCA to pay off the lien if they find out that it they funded a merchant who has defaulted (or never paid) their payment plan (it has alreayd happened).

These are all experiences that were part of the vast unknown of the cash advance world. As a new industry, we are all learning and adjusting accordingly. Now, I feel that the lenders cannot kid themselves into thinking they can resort to commercial bank standards and still survive in the industry, but some pullback was and is inevitable.