Saturday, December 13, 2008

Merchant Cash Advance Industry Update

The merchant cash advance industry has certainly made adjustments during these challenging economic times. As I've pointed out in 2007, companies that didn't make adjustments to their underwriting model would certainly be in trouble (eg. funding high risk business types, giving merchants too much money than their cash flow can handle, etc.) are now feeling the pain including some large merchant cash advance providers that have layed off a significant percentage of their staff and/or have lost their credit lines and/or have had them significantly reduced impairing their ability to fund new merchant cash advance deals. Those merchant cash advance providers that did position themselves correctly in late 2007 / early 2008 by underwriting correctly now have capital available to work with stronger credit applications in this recession that can not seek traditional business loans from their bank.

As I've also mentioned time and time again, merchant cash advance sales agents / brokers that were running large phone rooms with low cost marketing techniques such as voice broadcasting are finding it very hard to survive as this model was based on finding a "sucker" (sorry, a naive merchant cash advance provider, to fund their high risk paper) and underwriting has tightened up too much industry wide for these large phone rooms to survive on a low approval rate that is common with their marketing techniques.

Also, as I discussed in September 2007, in the post, Invasion Of The Subprime Mortgage Brokers we are now seeing the majority of this group leave the merchant cash advance industry as apparently they didn't learn their lesson with subprime mortgages, that you can't make a quick buck with this industry, it requires hard work. Unfortunately, some merchant cash advance providers (Editor's note: AmeriMerchant did not) aligned themselves with merchant cash advance resellers that were former subprime mortgage brokers and paid the price by buying the merchant cash advance paper they were selling them that turned out to have astronomical bad debt rates.

Similar to other industries, the current recession the United States is experiencing, will shake out the weak players and will allow the strong players to emerge even stronger.

AmeriMerchant / myself wish everyone a happy and healthy holiday as well as a prosperous New Year and we look forward to 2009!


Anonymous said...

anyway to list which cash advance companies are having their credit pulled or in trouble? None of these companies seem to publicly announce this, so, its important for ISO's and Agents to know this ASAP. Who wants to put business through an unstable funder?

Anonymous said...

Very interesting post. Many colleagues in the industry have been complaining about the difficulty with approvals and/or funding. This is why renewals and establishing strong relationships are key to enduring these leaner times.

I do question the theory thouogh about "upper tier merchants" coming to the table. Similar to the environment at the beginning of 2008 (the demise of Bear), thought traditional funding may be more difficult to obtain, a merchant used to 6-9% over multiple years is going to need time to come to terms with a cash advance product. My thoughts are that these merchants will be coming to the table en masse within 6-9 months, as all their resources have dried up.

What are your thoughts on this?

Anonymous said...

many merchants small and large are coming to the table for cash advances, no question, will it continue long term- who knows. its the first time the cash advance industry has gone through a recession like this. still, many merchants who arrive at the doorstep for a cash advance are having massive cash flow issues, and, a mca just isnt the answer- a a small bandaid maybe for those types of merchants. its just getting harder to find the right merchant i think everyone will agree- until consumers spend again, and, unemployment stops, mca's arent going to save the day