Merchant Cash Advance Blog

AmeriMerchant - One Of The Oldest & Largest Merchant Cash Advance Providers Celebrates Its Ten Year Anniversary

2012-01-10T16:22:00.003-05:00

AmeriMerchant, one of the oldest and largest merchant cash advance providers in the marketplace, is celebrating its ten year anniversary. During its history, AmeriMerchant has become a best-of-class brand in the merchant cash advance marketplace. For more information on AmeriMerchant's ten year anniversary, click here.

Vantiv and AmeriMerchant To Offer Working Capital Solution To A Potential 400,000 Merchants

2011-10-03T10:58:00.003-04:00

Vantiv (formerly Fifth Third Processing Solutions) along with National Processing Company (NPC), a Vantiv subsidiary, announced today they will be offering a merchant cash advance solution provided by AmeriMerchant to their nearly 400,000 merchants they support. For more information on this merchant cash advance / working capital partnership, please click here.

North American Merchant Advance Association (NAMAA) announces New Members And Officers

2011-01-11T08:52:00.004-05:00

The North American Merchant Advance Association (NAMAA), a 501c non-profit industry association that provides guidance and helps influence and shape the merchant cash advance industry through leadership, education and the sharing of information, announced today the addition of four new members to its organization as well as the election of new officers. For more information on this story, click here.

NAMAA is the only industry voice for the merchant cash advance industry and currently represents 80%+ of the largest merchant cash advance providers in the industry. NAMAA also offers risk management tools to allow merchant cash advance providers to reduce their default rates from merchants that have previously defaulted with other merchant cash advance providers.

Note: David Goldin, editor of this blog is also the President of the North American Merchant Advance Association.

First Data Becomes An Approved Processor Of AmeriMerchant Merchant Cash Advance Program

2010-12-23T09:49:00.004-05:00

First Data, one of the largest merchant processors in the world, has entered into an agreement with AmeriMerchant to become an approved processor of the AmeriMerchant merchant cash advance program. This deal will expand AmeriMerchant's market share by allowing First Data ISOs to offer the AmeriMerchant merchant cash advance program to their merchants. For more information on this story, see the story in The Green Sheet or ISO & Agent

First Data SpendTrend Report Positive Indicator For Merchant Cash Advance Revenue?

2010-11-10T08:39:00.006-05:00

The following information can be seen as positive news for the merchant cash advance industry.

Nation's Restaurant News is reporting that First Data released in their October 2010 "SpendTrend" report that "Consumer credit- and debit-card spending in restaurants and bars grew by 9.5 percent in October year-over-year, the highest growth in more than 18 months."

Being that First Data has a huge amount of merchants to collect data from, this is a very positive indication that perhaps consumer spending could be on the rise for at least restaurants. This information holds well for the merchant cash advance industry as the amount of money a restaurant and/or bar can qualify for is based on their monthly historical credit / debit card processing totals.

Looking To Acquire Merchant Cash Advance Providers and Merchant Cash Advance Resellers

2010-10-23T14:36:00.005-04:00

If you are a merchant cash advance provider (fund your own merchant cash advance deals) or a reseller of merchant cash advances with an office, sales staff, etc. that caters to the US or Canadian marketplace, AmeriMerchant is currently seeking potential acquisitions in the marketplace. If you are interested, please contact me directly at dg@amerimerchant.com. All inquiries will be kept confidential.

-David

NOTE: The editor of this blog is also the President & CEO of AmeriMerchant.

AmeriMerchant Consolidates With Leading Canadian Merchant Cash Advance Provider

2010-08-02T10:38:00.003-04:00

AmeriMerchant (http://www.amerimerchant.com) one of the oldest and largest merchant cash advance providers in the United States and CanaFunding (http://www.canafunding.com), one of the best established merchant cash advance providers in Canada, have announced a merger of their operations that will allow AmeriMerchant's US-based sales channels to offer a merchant cash advance product to the Canadian marketplace.

For more information, visit the story in the Financial Post, a Canadian newspaper.

Editor's Note: The Editor of this blog is also the CEO of AmeriMerchant.

Merchant Cash Advance Industry Update

2010-07-17T15:18:00.006-04:00

I've received feedback from many people inside and outside of the merchant cash advance industry asking when I think the merchant cash advance industry will continue to expand again. There are obvious signs that there aren't enough good deals out there when many providers are marketing "they specialize in deals that no one else will take."

I think while we keep reading that "banks aren't lending to small businesses", I don't think that is the whole picture, I think that an important aspect that people are overlooking is "do business owners want to borrow right now?" Whether it's a traditional business loan or an alternative financing solution such as a merchant cash advance or factoring, businesses don't appear to be wanting to take on as much obligations as they have in the past.

Until the macroeconomics change where unemployment goes down and consumer spending goes up - why would the average business owner in July need money to buy more inventory when their current inventory isn't selling? Why would the average business owner open another location in this environment (compared to the % of owners that did this say 4 years ago)?

Until the macroeconomics change, I don't think the demand level for business owners to take on additional obligations, including alternative financing products such as a merchant cash advance, will increase substantially compared to previous years.

I think this will also put pressure on some merchant cash advance providers, especially ones that don't have substantial capital to ride out this storm, to start funding deals they shouldn't be funding, etc. which leads to a bigger disaster down the road as many merchant cash advance providers (most who aren't still in business) learned a couple of years ago.

Merchant Cash Advance Featured In American Express Business Card Holder Article

2010-05-10T21:37:00.003-04:00

American Express publishes a series of articles for its business card holders. One recent article entitled, Alternative financing: Where to turn when the bank says ‘No’ by Elizabeth Wasserman lists the merchant cash advance as alternative financing solution when the banks say "no" to a business.

The article quotes AmeriMerchant and myself as follows:

A handful of independent finance companies will give merchants a lump sum upfront in exchange for a share of their future credit-card sales. Different than a loan or lease arrangement, a merchant cash advance is based on a business’ monthly credit-card sales history, says David Goldin, CEO of AmeriMerchant and a founding member of the North American Merchant Advance Association. "It's a buy-and-sell transaction," Goldin says. "We buy $10,000 in future credit card sales today for $8,000 and we get a specified percentage of future sales from customers."

Editor's Note: David Goldin is the President & CEO of AmeriMerchant and the author of the merchant cash advance blog.

North American Merchant Advance Association Announces Merchant Cash Advance Best Practices

2010-04-29T07:47:00.006-04:00

While merchant cash advances have been around for quite some time, like many industries it has seen its share of scrupulous and unscrupulos providers. The North American Merchant Advance Association (NAMAA) recently released it's recommended Best Practices for the Merchant Cash Advance Industry.

As a founding member of NAMAA, I commend our co-members which make up the majority of the players in the merchant cash advance industry for coming together to ensure the merchant cash advance product is sold and executed properly so that it helps the merchant and doesn't hurt the merchant.

For those merchants reading this blog, proceed with caution when doing business with a non-NAMAA merchant cash advance provider. NAMAA members who bear the association logo on their website have taken the time, capital and commitment to ensure their offering is made in a standup way and helps them stand out from certain providers in the industry who have used tactics that the industry and the association look down upon.

Buyer beware, stick with a NAMAA member and look for the following logo:

Merchant Cash Advance Partnership Between United Bank Card and AmeriMerchant

2010-04-05T13:00:00.004-04:00

I am proud to announce that United Bank Card, Inc. (UBC), ranked by the Nilson Report as one of the largest payment processors in the United States, and AmeriMerchant, one of the oldest and largest providers of merchant cash advances, announce their partnership to offer working capital to both potential and existing United Bank Card merchants. For more information on this partnership, click here.

This partnership will allow United Bank Card's 100,000+ merchants access to working capital in a environment that can be extremely challenging for small businesses seeking a traditional loan product from the bank.

Merchant Cash Advances Weren't Around in 1942

2010-02-24T17:36:00.006-05:00

Merchant Cash Advances weren't around in 1942, but business bank loans were. According to today's Wall Street Journal article, Lending Falls at Epic Pace, US banks posted last year their sharpest decline in lending since 1942. Does anyone see a merchant cash advance opportunity for all those businesses in 2010?

Merchant Cash Advance Demand

2010-02-10T11:58:00.009-05:00

Many merchant cash advance providers are indicating there is less demand for the product the last few months compared to this time period last year and the year before. There are several factors that can be responsible for this including many merchant cash advance providers were funding deals in the past that they would not fund today (and paid a very hefty price for doing so, namely going out of business). I think one of the key reasons which I have pointed out in the past is there also has to be an increase in business owner confidence for there to be an increase in demand for the merchant cash advance product.

The NY Times had an interesting article yesterday, entitled Businesses Reduced Inventories in December which further validates my theory, that if business owners don't have confidence in the economy, they are going to market / advertise less, hire less and stock lower inventories.

The article indicates, "The weakness in inventory rebuilding in December was an indication that businesses, still struggling to emerge from the deepest recession in decades, are not yet confident enough in rising sales to begin rebuilding stockpiles on a sustained basis."

As the CEO of, AmeriMerchant, one of the oldest and largest merchant cash advance providers in the space, I can tell you that a very common reason why merchants turn to alternative financing such as the merchant cash advance product is to stock up on inventory.

Merchant Cash Advance Industry 2009 Year End Summary

2009-12-24T11:17:00.006-05:00

'Twas the night before Christmas, when all through the house Not a creature was stirring, not even a mouse; This pretty much summarizes the merchant cash advance industry industry the last few months - very quiet compared to previous years. Both from an industry news perspective and from levels of merchant demand compared to other years.

I'm hearing certain merchant cash advance provider's funding levels are down by as much as 40% from this time last year.

2009 was a very challenging year for many merchant cash advance providers - many losing their credit lines / funding sources. Some had to scale back considerably, others had to scale back 100% - meaning they shut down, layed off a large % of their staff, etc.

As I indicated in the middle of the year, many of these merchant cash advance providers could not sustain the huge losses they took by funding unqualified applicants in 2007/2008 or "crushed their cashflow" with too high of a withholding % to retrieve the future credit card receivables purchased.

One of the things I believe is needed to "jump start" demand for alternative financing products like a merchant cash advance from business owners in 2010 is the obvious - the economy needs to improve which will improve business owner confidence. The unemployment rate needs to decrease so consumers are spending more at their local businesses, hence giving local business owners a reason why they want to expand, buy more inventory, advertise/market, etc.

With all that said, there are a few good merchant cash advance providers still standing (no where near the number that there used to be) that make up 90% of the market. I still think 1 or 2 more will fall in 2010.

It will certainly be a interesting time in 2010 and I look forward to being one of the remaining industry leaders left in the merchant cash advance space.

From all of us at AmeriMerchant, we wish all the readers of the Merchant Cash Advance Blog, a Happy and Healthy Holiday and a very prosperous 2010.

Merchant Cash Advance Green Sheet Article

2009-11-23T12:07:00.004-05:00

The Green Sheet just published an article on the current state of the merchant cash advance industry entitled, The squeeze in merchant cash advance.

Like I've said all along, the 2007 Merchant Cash Advance model doesn't work. There will only be a few legitimate merchant cash advance providers doing any real volume when the dust settles.

Note to Merchant Cash Advance Providers: It's not how much you fund a month, it's how much you can collect back. To those providers that don't understand, you need to be able to collect the money back to make a profit and stay in business.

Merchant Cash Advance Twitter

2009-11-15T08:23:00.003-05:00

The Merchant Cash Advance Blog has become the most popular blog in the merchant cash advance industry. I am pleased to announce that in the following the steps of this blog, that the Merchant Cash Advance Blog is now on Twitter. I welcome you to follow me on Twitter for the latest updates in the merchant cash advance industry including breaking news, industry trends, etc. You can find this on Twitter at http://www.twitter.com/mcashadvance.

SBA Loan Article Indicates More Opportunity For Alternative Financing Such As The Merchant Cash Advance Product

2009-10-17T08:19:00.004-04:00

According to a recent article on CNNMoney.com, titled A grim year for small business lending, "The SBA Loan volume plunged 36% in 2009 as banks slammed their vaults shut to small businesses."

This is yet another example of how an alternative financing program such as a merchant cash advance is starting to be looked at by business owners who in the past utilized traditional loan products such as a SBA loan or a small business unsecured line of credit from their bank.

As the media is reporting time and time again, small businesses can not get access to the necessary capital they need to drive their business. This will lead to an increased opportunity for those in the merchant cash advance industry as we are starting to see an increase in applicants who in the past utilized their local bank as their source of capital.

Furthermore, the lack of traditional loan products readily available in the marketplace can be a tragic situation for many small businesses if they can not get access to capital for the upcoming holiday season - which can amount to 50% - 75% of many retailer's annual sales.

It will be interesting to see the demand levels in the coming weeks for the merchant cash advance product as retailers looking to borrow from their banks are being shut out.

Merchant Cash Advance Provider CEO David Goldin of AmeriMerchant Featured Again In The New York Times

2009-10-08T07:50:00.003-04:00

I want to thank Brent Bowers again of The New York Times for featuring me in a follow up article in today's business section of The New York Times. I believe AmeriMerchant is the first and only merchant cash advance provider to be featured in The New York Times.(now twice). The original article was in August 2007 regarding the AdvanceMe patent situation. This article features four entrepreneurs, myself being one of them, that were previously featured in the paper and following up to see how they are holding up and prospering in this challenging economy. An online version of the article can be found here

Even More Positive Merchant Cash Advance News - Survey Indicates That Consumers Plan To Increase Their Restaurant Spending

2009-09-09T11:17:00.006-04:00

Restaurants are probably the most common industry that utilize the merchant cash advance product. The amount of working capital a business can receive with a merchant cash advance is based on their sales levels of credit card / debit card sales. Since late 2008 and most of 2009, restaurants have been for the most part hard hit by the economy as consumers were eating out less at restaurants.

However, Nation's Restaurant News, a leading news provider for the foodservice industry, is reporting today that Atlanta-based RBC Capital Markets' September restaurant spending survey, indicated that consumers plan on spending 14% more in restaurants compared to September 2008.

This can only help the merchant cash advance industry as it will not only help build restaurant owner's business confidence, but will also increase the amount of working capital they will qualify for in a few months if there credit card sales increase due to an increase in consumer spending at restaurants.

Merchant Cash Advance Demand - More Positive News - Small Business Confidence Rises To Highest Level In 18 Months

2009-09-07T11:59:00.005-04:00

As I've pointed out previously, in order for the merchant cash advance industry and/or traditional business loan products to see an increase in sales, there has to be business owner demand for the product.

What drives demand? One key factor is a business owner's willingness to take on additional debt or obligation. What drives this willingness? Economic Confidence - they have to be confident they can pay it back, they have to be confident they can do something productive with the money, they have to be confident it makes sense to open a new business, market/advertise, renovate, etc. In most cases, be on "offense" rather than "defense."

The good news is according to the latest Discover® Small Business WatchSM, economic confidence among small business owners jumped to the highest level in in 18 months in August as more owners expressed faith that the U.S. economy is on the rise and gave signs that they are more willing to invest in advertising and new inventory. While we aren't out of the forest yet, this is all good news and what I predict will be a large demand for retailers to stockup with inventory for the holiday season. If a retailer isn't properly stocked for the holiday season with inventory to sell, they may as well close their doors....

Can Merchant Cash Advance Demand Be On The Rise As Small Business Confidence Rises For Second Consecutive Month In Spite of Cash Flow Concerns?

2009-08-03T11:36:00.005-04:00

The nature of the merchant cash advance product requires business owners to have a positive need for this alternative financing product. What consititues a "positive need"? Typically functions associated with "expanding" such as opening up a new business / new location, buying additional inventory, advertising / marketing, renovating, etc. which obviously does not occur as frequently in a down economy. The merchant cash advance industry has seen a decrease in demand for the product since early 2009 which I attribute to a lack of small business owner confidence.

One positive sign that may show this trend flattening out or even reversing slightly is that economic confidence among small business owners rose for the second consecutive month, although concerns about being able to pay their bills jumped significantly in July as measured by the latest Discover® Small Business WatchSM. The index rose to 82.1, up from 80.9 in June.

One part of the report that I found very interesting was:

"Those who are borrowing aren't using traditional sources. When asked if they have applied for new credit cards, lines of credit or loans, 82 percent said they had not, while 17 percent said they had and 2 percent weren’t sure. Of those who did apply for loans or credit, 44 percent said their applications were approved, 31 percent were rejected, 7 percent were pending and 18 percent weren't sure."

While I don't think 82% of the people utilized a merchant cash advance when indicating they weren't using "traditional sources" - it reiterates the need for alternative financing solutions such as the merchant cash advance.

It will be interesting to see what happens if small business confidence continues to rise. My theory is there will be a direct correlation to business owners looking to "expand" again and thus seeking alternative financing options such as a merchant cash advance as traditional business loan products are still very challenging for business owners to obtain.

AmeriMerchant Launches Merchant Cash Advance Portfolio Servicing Program

2009-06-29T13:32:00.007-04:00

AmeriMerchant, one of the oldest merchant cash advance providers in the industry, announced today its new Merchant Cash Advance Portfolio Servicing Program. This program is designed for companies that are funding merchant cash advances and looking to reduce their overhead associated with the MCA business. In addition, this program can be used for creditors / investors / lenders of Merchant Cash Advance providers that are looking to preserve their capital and are interested in exiting the business as well as generating additional revenue in the future.

Editor's Note:The author of this blog is also the President & CEO of AmeriMerchant

Merchant Cash Advances A Solution For Advanta Cardholders?

2009-06-27T08:57:00.005-04:00

According to bloomberg.com, Advanta Corp, a leading provider of small business credit cards, recently terminated its customer credit-card accounts due to a reported astounding 20% bad debt rate. For those former Advanta customers that need access to working capital in this challenging credit environment, perhaps a merchant cash advance can be an excellent alternative solution to a traditional business credit card which requires a personal guarantee unlike a traditional merchant cash advance.

Merchant Cash Advance 2009 Update - Amazing What 12 Months Can Do

2009-06-27T08:43:00.004-04:00

The merchant cash advance industry has certainly taken a 180 degree turn from where it was 12 months ago. Due to the economic climate and the tightening of the credit markets has resulted in many cash advance companies that have ceased operations, are only funding renewals and/or were forced to liquidate their portfolios by their credit providers. Furthermore, a good portion of merchant cash advance agents (specifically the large "phone rooms", that received much negative press in 2007/2008) have ceased operation as well. A large portion of these agents were born out of the mortgage industry. The merchant cash advance industry is maturing and there were 10s of millions of dollars worth of advances given in 2007/2008 that never should have been advanced. This may have been industry types that don't work well with this product, holdback %s that created too much risk for the MCA provider and/or providing capital to people that didn't have the credit worthiness to pay it back. Unfortunately, many new merchant cash advance providers learned the hard way that this is not an easy business at all.

The good news is those players that have been established for a while and have strong distribution channels that aren't "pumping junk paper" into their company will reap the benefit as the economy turns around. While banks are still tight with their business lending requirements, many businesses are also hesitatent to take on additional debt / obligations in this economy, which can cause a decrease in demand for alternative financing products.

I think we will see a few more players close up shop in 2009, but those merchant cash advance providers that can ride out 2009 will emerge in 2010 even stronger and the "boat will have left the dock" for any new players trying to make a major penetration into the merchant cash advance market.

SBA Loan Defaults Increase - A Lesson To Be Learned For Merchant Cash Advance Providers?

2009-03-16T17:45:00.006-04:00

While a merchant cash advance is not a loan product, the SBA does cater to a similar audience as the MCA industry. Here is an interesting article that indicates SBA loan defaults have JUMPED from 2.4% in 2004, to 8.4% in 2007 to 12% in 2008 (11.8% to be exact).

The scary part is a direct funder of an alternative financing product such as a merchant cash advance product can not make money at 12%, how can the provider of a low margin product such as an SBA loan survive? I guess they can't.......

One key difference, when a business defaults on a SBA loan product, the business owner personally guarantees the loan in most cases and leaves their personal assets exposed. With a traditional merchant cash advance product (Factoring future credit card receivables), the merchant cash advance provider writes off the future receivables purchased from a business that legitimately goes out of business.

Alternative To A Merchant Cash Advance - Sell Your House?

2009-02-05T17:46:00.004-05:00

Here is a link to an interesting story on CNN, entitled Selling their home to keep their small businesses alive. This story is evidence on how difficult it can be for small businesses to obtain traditional loans and the fact that banks are not making small business loans. While many people feel that alternatives to a loan product, such as a merchant cash advance is expensive, I think selling your house can be a lot more expensive....

BusinessWeek Article On Vetting A Merchant Cash Advance Provider

2009-02-02T20:12:00.007-05:00

While many mainstream press publications have focused on the cost of the merchant cash advance product compared to a traditional loan product (and for the most part not indicating the benefits of the merchant cash advance product and/or the fact that traditional loans are very challenging to come by these days for small businesses), BusinessWeek recently published an article called How To Vet a Merchant Cash Advance Provider.

The fact that a main stream business publication like BusinessWeek is giving advice to small business owners on how to choose a merchant cash advance provider, further demonstrates how alternative financing solutions are becoming more and more popular for businesses.

While I feel the author of the article, John Tozzi, tried to be fair and balanced as far as indicating some of the pitfalls to look out for, I think it needs to be pointed out that the examples of complaints indicated in the article, probably make up less than 1% of the overall transactions done by the merchant cash advance providers, which is an excellent record for any industry.

I also believe that the industry has taken great steps to weed out the unscrupulous providers of this product and many of them have fallen by the waste side, mainly due to the economy and has taken a positive and successful approach to self regulating itself, especially with the creation of an industry association, The North American Merchant Advance Association.

Merchant Cash Advance Industry Update

2008-12-13T07:31:00.009-05:00

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!

Merchant Cash Advances And FICO Scores

2008-10-23T18:17:00.004-04:00

It is interesting to see during this recent business credit crunch that the average credit profile for a merchant cash advance applicant is on the rise. We have seen a plethora of FICO scores in the 700s and even 800s which typically first seek traditional bank loans and credit lines before seeking alternative funding products such as a merchant cash advance. As I mentioned in my previous post, Merchant Cash Advance And The Business Credit Crunch, that the current conditions of the credit environment is an opportunity to introduce businesses to the merchant cash advance product that historically may have sought other options.

As I also pointed out previously, these better credit applicants will be less receptive to "cheap marketing" techniques such as voice broadcasting but require a more consultative approach about this product. There is an opportunity here that once the better credit score applicants are exposed to this product that they can use it in conjunction with traditional bank loan products once the credit markets eventually open up should the traditional product not be able to meet 100% of their needs. For example, a bank may only be willing to eventually give a business a $100,000 line of credit when they need $150,000 and this is where they can mix it with an additional $50,000 through a merchant cash advance. Time will tell, but I believe the average FICO score of the merchant cash advance customer will increase and remain higher once the credit markets / banks open up again to small businesses.

Merchant Cash Advance And The Business Credit Crunch

2008-10-06T18:45:00.010-04:00

I've gotten several emails about how I think the recent business credit crunch will affect the merchant cash advance industry. The way I see it, there are pros and cons that are going to evolve as a result of the recent credit crunch and what appears to be a potential meltdown of certain aspects of our financial system. There isn't a newspaper, magazine, radio or television program that hasn't spoken about how hard it has become for small businesses to obtain a business loan, line of credit, etc. from their local bank. When it comes to business loans, banks have traditionally been a challenge for small to medium size businesses, especially retailers and restaurants without a strong personal guarantee (even then it can be challenging). Now, it's next to an impossibility. With the mergers of Washington Mutual / Chase and the scenario with Wachovia and Wells Fargo / Citibank there will be even fewer banks for small businesses to turn to.

All these factors above have resulted in a HUGE increase in demand for the merchant cash advance product. However, because of an increase in default rates (partially do to the economy, partially due to inexperienced merchant cash advance providers who first entered the market in 2007), you are seeing the underwriting criteria for ALL merchant cash advance providers tighten up (some have even been driven out of the marketplace because they funded the "wrong deals" in 2007 and their funding sources have cut them off).

However, there is a large opportunity now for MCA providers as well as Merchant Cash Advance resellers / agents to target a whole new clientele with stronger credit scores that typically would have gone to traditional sources such as bank, that no longer can. The good news is this will work well for MCA providers and small / independent sales organizations. The bad news is for the larger "merchant cash advance phone rooms" that we saw emerge from the subprime mortgage lending business, I can't see how they will be able to survive in the long run. These companies were setup and able to survive by finding "the new MCA provider in town" that would take their C,D and E paper because they didn't know any better. These places to "dump garbage paper" are all but gone and add to the fact that we are seeing a trend in a stabilization and/or a decrease in merchant cash advance broker commissions as I predicted would happen in 2008 (see 2008 Merchant Cash Advance Predictions) will make it next to impossible for these large cash advance broker shops to survive. The smaller independent shops that aren't using cheap / commodity type marketing techniques (eg. voice broadcasting, buying leads from telemarketing firms) and are actually taking the time to target higher end merchants will find a viable business model as they don't need to write a huge quantity of business like the larger merchant cash advance reseller brokers to survive.

Another aspect of the merchant cash advance business I predicted back in December 2007 was that Underwriting will tighten up / approval rates will go down. This is certainly not a bad thing as if MCA providers didn't change their underwriting models in 2007, they will not make it to the end of 2008 (In fact, a few merchant cash advance providers exited the business and/or lost their credit lines / were liquidated by their investors). We also have seen a complete slowdown of new players entering the merchant cash advance space most likely due to fear and the lack of their ability to raise capital in this environment.

With all the above said, I believe this is probably one of the best times for the merchant cash advance industry to come out even stronger. Those that aren't underwriting foolishly (or approved too many bad deals over the last 6 - 12 months) will be able to increase the credit criteria of their average merchant and be able to emerge from this current credit crunch / volatile economy with a strong portfolio and even a stronger company. The bad news is those MCA providers who didn't underwrite properly and haven't adjusted accordingly in this environment probably won't be around in six months from now. As a merchant cash advance agent / reseller, you want to make sure you are aligning yourself with a company that will be here in six months from now to be able to pay your monthly residuals.

Merchant Cash Advance mentioned in MSNBC / Entrepreneur.com article

2008-09-02T23:49:00.007-04:00

msnbc.com mentions the merchant cash advance product in a recently featured article entitled Control Your Cash Flow which talks about how businesses can reduce their vulnerability during this recent credit crunch. One of the ways it talks about how businesses can do this is to "Raise capital in innovative ways other than traditional banking." and specifically mentions about a merchant cash advance, namely "If you accept credit cards, there is something called a merchant advance where a third party will come in and review what your revenues have been and advance you capital today that you pay back in anticipation of future credit card receipts." This article appears to be syndicated from Entrepreneur.com and further backs up the idea that the merchant cash advance product has become a mainstream, accepted form of alternative financing for small to medium size businesses.

New York Times Cover Story Regarding Banks Reducing Business Loans - A Definite Merchant Cash Advance Booster

2008-07-28T09:23:00.003-04:00

The front page of today's New York Times features an article titled Worried Banks Sharply Reduce Business Loans. This article talks about how banks are struggling to recover from their losses on real estate by curtailing loans to businesses which should show an increased demand for alternative working capital products such as the merchant cash advance.

2008 Merchant Cash Advance Predictions - 1/2 Way Follow Up

2008-07-08T21:00:00.007-04:00

In December 2007, I wrote a post entitled 2008 Merchant Cash Advance Industry Predictions and being that we are now just halfway through 2008, I wanted to follow up on this previous posting.

It looks like it's only 1/2 way through the year and I went 3 for 4 on my merchant cash advance industry predictions with 6 months to go for the fourth one to come true.

Here is a recap:

1) Underwriting will tighten up / approval rates will go down - this one I definitely hit on the head. Between a combination of a down economy, merchant cash advance providers working together to prevent fraud and many merchant cash advance providers that have either lost or in jeopardy of losing their credit lines, it's common knowledge that while merchant cash advance submissions are way up as a whole, the industry approval % is down double digits %s. This low approval rate has actually driven many large, high overhead MCA brokers to either lay off employees or completely shut down because some of the "junk paper" that was approved in 2007, simply no MCA provider will accept now.

2) Sales Agent Commissions will stabilize and/or decrease - in 2007 we saw some companies paying extravagant sales agent commissions that simply didn't make sense. One would think they were trying to buy marketshare. I would imagine after they reviewed their financials / profitability, they realized they couldn't make money paying out the type of commissions they were, hence the marketplace has adjusted accordingly. Some merchant cash advance providers / merchant cash advance agents have actually raised their cost to the customer to maintain some of these commissions.

3) Self Regulation - In December 2007, I had indicated that:

"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 April 2008, a merchant cash advance industry trade association called the The North American Merchant Advance Association was announced to promote best practices as well as allow the leading merchant cash advance providers to work together to introduce various risk tools to combat merchant fraud.

4) Mergers & Acquisitions - In 2008 I believe we will see the first major merger and/or aquisiton in the merchant cash advance industry.

While we haven't seen any significant US merchant cash advance provider merge with or acquire another US based provider, I still think we have some time to go. There is a huge upside in the merchant cash advance industry for private equity firms looking to enter this space. We did see a private equity firm make an investment in one leading merchant cash advance provider so far this year and I expect there will be some other deals done this year as well.

Merchant Cash Advance Cost Comparison

2008-06-16T18:18:00.005-04:00

I have received several emails about the cost of a merchant cash advance compared to other working capital solutions. One selling point of this product is that while it's more expensive compared to traditional small business loans (assuming the merchant can qualify for a small business loan as especially in this credit crunch, banks have raised their small business loan criteria even higher), the cost is pale in comparison to any equity solution including taking on additional investors and/or giving up equity in your business. Keep in mind that a merchant cash advance is not a loan product and does not have absolute repayment like a loan which also requires a MCA provider to charge more for that compared to a traditional small business loan. With a merchant cash advance, once you sell a MCA provider your future credit card / debit card receivables that is all the MCA provider is entitled to, no future upside in the business, no profit sharing etc. So what is more expensive? A) Selling your future credit card receivables / debit card receivables at an average discount of 26% or B) Giving someone a percentage of your business forever or until you have to buy them out a premium? I can assure you that option "B" will far exceed any discount that you sold your future credit card / debit card receivables for.

Merchant Cash Advance Provider Fast Capital Ceases Operations

2008-06-04T23:16:00.004-04:00

It appears that merchant cash advance provider Fast Capital has ceased operations. It is rumored that another merchant cash advance provider will be managing their existing portfolio / customer base for their lender, Goldman Sachs. It will be interesting to see the outcome of this.

Cover Story On AdvanceMe Merchant Cash Advance Patent Appeal

2008-05-27T14:57:00.004-04:00

The cover story of the May 23rd edition of ISO & Agent Weekly titled, "Court Says AdvanceMe Has No Cash-Advance Patent" was an interesting article from all perspectives of this landmark ruling for the merchant cash advance industry.

In addition, in this issue, they feature a story called "Association Formed For Cash Advances" which talks about the newly formed North American Merchant Advance Association which has been receiving praise throughout the industry.

AdvanceMe Loses Merchant Cash Advance Patent Appeal

2008-05-15T11:41:00.003-04:00

I just received word that AdvanceMe has lost their appeal on their patent. I thought the call I got was a joke because the hearing was just last Tuesday, turns out the court realized in two seconds that there was no merit to this appeal. It shows you how little basis AdvanceMe had to even appeal this decision. You can see the court's document by clicking here.

The Electronic Transaction Association (ETA) has already reported on this "lightning fast" ruling as well. Click here for the story.

Merchant Pleads Guilty To Merchant Cash Advance Fraud

2008-05-14T14:02:00.009-04:00

A Virginia merchant committed fraud on several merchant cash advance providers and is facing up to 20 years in prison, $1 million in fines and had to surrender his house, car and motorcycles. The story can be found here.

This merchant fraudulently took a business cash advance from several MCA providers in his customer's names. One of the missions of the recently announced North American Merchant Advance Association is to prevent fraud like this from occurring.

Merchant Cash Advance Association - Another Article In The Green Sheet

2008-04-30T23:59:00.003-04:00

The North American Merchant Advance Association has been receiving positive press in all the trade publications since it was publicly announced on April 15th that the leading merchant cash advance providers have come together. The Green Sheet has just written a story about it titled, Cash advance leaders advance.

Merchant Cash Advance Closing Fees / Consulting Fees / Personal Service Fees (PSF)

2008-04-29T09:20:00.006-04:00

I've received countless emails about what my opinion is on agents / ISOs charging a customer an additional upfront fee on a merchant cash advance such as closing fees, consulting fees, finder's fees and/or personal service fees (PSF) and the answer is to the merchants "stay away and run." You can easily find another merchant cash advance provider that won't charge you any upfront fees and will save you potentially thousands of dollars. These fees put unnecessary strain on both the merchant and increases the risk to the merchant cash advance provider.

This money is expensive enough without an agent / reseller tacking on additional costs to the merchant. Merchants should know that an agent / reseller / ISO is receiving up to 36% of the fees that a merchant cash advance is charging the customer. For example, if a merchant receives a $20,000 advance and the payback is $27,600, the agent bringing the deal to the MCA provider can be receiving up to $2,760 in commission. The merchant is selling their receivable to the MCA provider at a $7,600 discount and the salesperson is receiving $2,760 of the $7,600 (which is 36% of the fees being charged).

Now for a agent to charge another 5% - 10% of the funded amount to the customer ($1,000 - $2,000) turns the deal from a 1.38 factor in this example to the merchant receiving $18,000 and paying back $27,600 turns the arrangement into a 1.53 factor (up from a 1.38), a huge strain on the merchant and increases the chance of merchant default as well as increased risk for the merchant cash advance provider. The agent is then earning it on both sides from the customer and the merchant cash advance provider and in this example earning $4,760 of the $7,600 discount (62% of the fees charged the customer). There is an old saying, the bears make the money, the bulls make the money and the pigs get slaughtered.

I've been told by some agents that there is no way they can make money without charging closing fees, my response to that is I've owned merchant cash advance agencies and you can easily make a lot of money in this business, especially with the equity value you build with merchant processing residual. For those that can't figure out how to make money without charging closing fees, please feel free to contact me and I would be happy to discuss a very viable model. My rebuttal to that is for those agents that have sold credit card processing, when is the last time you made $4,000 upfront on a merchant account plus receive the monthly credit card residual? Selling credit card processing is far more competitive compared to merchant cash advance.

There has been some negative press as of late about some of the sales practices in our industry and almost every single instance involved a sales agent / reseller charging an upfront fee on a merchant cash advance.

As the industry comes together to establish best practices, I would imagine and hope charging upfront fees will be one item that merchant cash advance providers prohibit.

Merchant Cash Advance Product / Association Featured In Online TV Show - SBTV.com

2008-04-27T18:38:00.006-04:00

SBTV.COM - Small Business Television appears to be the first video broadcast about the merchant cash advance product as well as the recently announced North American Merchant Advance Association. You can view the story on MCA providers as well as the merchant cash advance industry association at sbtv.com - Small Business Television approximately 1:07 into the clip.

Merchant Cash Advance Association Mentioned In American Banker

2008-04-25T08:22:00.007-04:00

An article about the North American Merchant Advance Association was recently written in American Banker (You will need a subscription to American Banker to view the article). In addition to The Green Sheet story, this is the second article about the merchant cash advance industry association specifically about how the industry has come together to create merchant cash advance underwriting / risk tools as well as establish best practices. This association is already starting to get recognition in all the leading industry publications.

The article features some nice quotes from NAMAA's President, Jeremy Brown of Rapid Advance. The North American Merchant Advance Association is currently in discussions with some other leading merchant cash advance providers to join and those announcements will be made shortly. I encourage all merchant cash advance providers to join this group.

Merchant Cash Advance Industry Comes Together

2008-04-15T11:30:00.009-04:00

It was just announced today that the leading companies of the merchant cash advance industry have come together to form an industry trade association called The North American Merchant Advance Association.

This trade association will allow merchant cash advance providers to share industry education and professional development, ethical standards and best practices guidelines, the development of industry relevant products and services, and the engagement in regulatory and legislative advocacy.

An important focus of NAMAA is the creation and maintenance of a database of merchants that have engaged in unethical or fraudulent practices in securing past merchant cash advances.

I believe this association (Editor's Note: AmeriMerchant is a founding member of the North American Merchant Advance Association) will benefit the merchant cash advance providers, sales agents / representatives as well as merchants by establishing self regulation and best practice guidelines.

Any merchant looking for a merchant cash advance, I would strongly recommend working with a provider that is a member of the North American Merchant Advance Association.

Any merchant cash advance providers interested in joining, can contact me at dg@amerimerchant.com.

Merchant Cash Advance Agent Shakeout

2008-03-29T11:32:00.008-04:00

I am seeing a new trend in the merchant cash advance marketplace, namely merchant cash advance ISOs, agents, resellers, etc. closing their doors. This is no surprise to me as we saw a huge influx of subprime mortgage brokers entering our space. I estimate there were upwards of 100 phone rooms of converted subprime mortgage brokers trying to sell the merchant cash advance product thinking it was a way to make a quick buck. Those that took the strategy that selling a merchant funding will take time and learned from the lessons of the subprime mortgage meltdown are those that are still standing and potentially will be successful. There is another train of thought that is inevitable to fail - those that thought they can sell business cash advances with minimal capital expenditure, meaning hiring unqualified salespeople using inexpensive marketing techniques such as voice broadcasting (with these providers giving the same data to 100s of phone rooms) to dial hundreds of thousands of businessses an hour with a prerecorded message. (Merchants around the country are getting 3 - 5 prerecorded calls a day). The challenge is the quality of anyone that is going to press '2' on their phone for money tends to be "lower hanging fruit" and lower quality deals. With the recent credit crunch and many merchant cash advance funding companies tightening up, some merchant cash advance agents were seeing approval rates as low as 15%-20%. There is no way they can survive and stay in business with that kind of approval rate. You did see some undisciplined merchant cash advance providers willing to get aggressive with many of these phone rooms about 3 - 6 months ago, but that has now gone away as these providers have learned their lesson with high default rates from these low quality deals. Offering a business cash advance product as your main product as I've said over and over again takes time, anyone looking to make a quick buck, they are in the wrong industry. Those that are well capitalized and run first class, professional sales organizations rather than a "boiler room" will be here for the long run.

Merchant Cash Advance Market Size - Part 2

2008-03-17T19:45:00.011-04:00

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?

Merchant Cash Advance Rumor

2008-03-13T17:03:00.003-04:00

I've heard now from multiple sources that one of the largest and oldest merchant cash advance providers is having some bad debt problems as a result of not having any discipline and funding deals that never should have been funded.

Merchant Cash Advance Blog #1 On Google

2008-03-09T11:34:00.003-04:00

Someone just sent me an email that the Merchant Cash Advance Blog is the #1 site on Google when you search on 'merchant cash advance.' With that said, Google reindexes itself so often and by adding this post may change the position. So, in addition to the Merchant Cash Advance Blog being mentioned by various media outlets including The New York Times, we are also featured as the #1 most relevant website by Google (at least for the time being) on the search term, "merchant cash advance."

AdvanceMe Takes A $565,000 Hit

2008-03-01T08:09:00.003-05:00

The Atlanta Journal-Constitution is reporting that merchant cash advance provider AdvanceMe has taken a $565,000 hit from an Atlanta Restaurant Group.

This is a perfect example how many times sales agents / ISOs and even merchant cash advance providers believe before a deal gets funded that it's a "good deal" because it's a large established restaurant group. Unfortunately the bigger they are, the harder they fall.

Accelerating Cash Advance

2008-02-27T17:06:00.004-05:00

The latest issue of The Green Sheet has an updated article on the merchant cash advance industry entitled, Accelerating Cash Advance.

I think this is a very well written article with quotes from CEOs of such companies as yours truly from AmeriMerchant, American Microloan, Merchant Cash And Capital, North American Bancard and AdvanceMe.

The spirit of article is very similar in line to what many of my postings over the last few months have indicated, the days of merchant cash advance companies approving everything are over. There are some industries that may never qualify for a merchant cash advance again because simply the product doesn't work for it based on the payment flow of the industry / the ability for the customer to control the cash register.

The article also speaks to how agents / ISOs and resellers of this product should be concerned about who they are sending their deals to today. As soon as you hear a company can't fund, RUN! Better yet, don't even get to that place, a lesser, normal commission will be worth more in the long run then what seems like a too good to be true commission from a company that won't be around in the long term.

One positive aspect is that the merchant cash advance industry is coming together to establish best practices for selling the product as well as establishing risk tools to eliminate unscrupulous merchants.

Merchant Cash Advance Market Size

2008-02-18T17:54:00.005-05:00

While the merchant cash advance industry is growing at an astounding pace, one question that keeps coming up is how saturated or not is the potential market? While there is no official study, estimates are that somewhere between 5% - 10% of the eligible marketplace has taken a merchant cash advance. I believe it's closer to the 5% range. What I do think is happening is that merchant cash advance salespeople, ISOs and agents are capturing the low hanging fruit, meaning that those merchants that have taken an advance before against their future credit card sales are one of the first to respond to a marketing campaign. The reason for this is they are more willing to listen to a salesperson as they are already familiar with the product. The challenge which takes patience is finding businesses that have never taken a merchant cash advance before, which makes up the other 90% - 95% of the potential market. The most successful merchant cash advance providers will be those that are able to tap into the other 90% - 95% of the market that have not yet taken a merchant cash advance.

Green Sheet Article - Sizing up Merchant Cash Advance

2008-02-05T16:56:00.000-05:00

The recent issue of The Green Sheet has an article about the merchant cash advance industry, Sizing Up Merchant Cash Advance.

This article was written by First Annapolis Consulting, a consulting firm that specializes in consulting and investment bank services for the payments industry. Most of their assumptions were previously indicated in this blog including the size of the industry (First Annapolis' best educated guess is $500 million to $700 million in future receivables purchased). I believe it's closer to $1 billion at this point (as mentioned in my October 2007 posting).

They also indicate how there will be some shakeup in the merchant cash advance industry as I predicted in my 2008 Merchant Cash Advance Industry Predictions.

Credit Crunch And The Merchant Cash Advance Industry

2008-01-22T23:36:00.000-05:00

Today's Wall Street Journal has an article entitled Credit Scare Spreads in U.S., Abroad that discusses how banks are making it even harder now for small and midsize businesses to obtain business loans.

This appears to be an exciting time for the merchant cash advance industry as it will potentially raise the credit criteria of the average applicant since borrowers who would normally goto a traditional lending source such as a bank for a business loan, may no longer be able to and will explore alternative financing solutions such as a merchant cash advance.

At AmeriMerchant, we have seen a huge increase in demand for our product over the past 60 - 90 days and I expect this trend to only increase. Merchant cash advance providers still need to make sure they are only providing working capital to those that truly qualify for it. I believe with the recent credit crunch, we will see more qualified applicants.

And for those that are keeping track, I predicted this back on my December 1st posting Merchant Cash Advance Industry Affected By The Subprime Mortgage Bust where I indicated:

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.

$97 Million Merchant Cash Advance Lead

2008-01-21T19:25:00.000-05:00

I've been in the merchant cash advance business for a long time and this email I got today certainly made me realize that now I've seen it all. I thought this would add some good humor to the blog.

Now lets see who has the deepest pockets out there (or has lost their mind to even consider giving a merchant cash advance this size). If anyone knows of an alternative financing source for this transaction, let me know and I'll put you in touch with the salesperson.

-David

Sent: Monday, January 21, 2008 4:17 PM

David,

I have been working your cash advance program and came across something big. Probably too big, but I have a question and was wondering if you could help. There is an Indian gaming company that owns 5 casinos. They want to borrow $97M against their future cash flow (approx. $48M annual Net Income). Can you do anything with it or do you know where I can find someone who can?

Nation's Restaurant News Article About Merchant Cash Advances

2008-01-15T13:24:00.000-05:00

Nation's Restaurant News, one of the leading trade publications for the foodservice industry, came out with a nice article on January 14, 2008 entitled Eschewing banks, some operators find fast, favorable financing with cash advance firms. This article is about the merchant cash advance product including the restaurant owner's perspective. You will need to register with www.nrn.com before being able to view it. They also have a print publication which the article may appear in.

Merchant Cash Advance Rumor

2008-01-11T18:22:00.000-05:00

There is a rumor that has been floating around the merchant cash advance industry for the last week or so (I've heard it now from three different sources) that a large merchant cash advance company is about to acquire a New York based merchant cash advance provider. I guess we'll know sooner than later if this rumor is true, my bet is it's not. If it is, I guess prediction #4 - Mergers & Acquisitons in my posting 2008 Merchant Cash Advance Industry Predictions would come true (not bad on my part, considering I just posted it on December 28, 2007).

2008 Merchant Cash Advance Industry Predictions

2007-12-28T06:43:00.001-05:00

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.

-David

The Merchant Cash Advance Year In Review

2007-12-16T14:19:00.001-05:00

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...

Merchant Cash Advance - EAR - Effective Approval Rate

2007-12-12T07:33:00.001-05:00

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.

Merchant Cash Advance Industry Affected By The Subprime Mortgage Bust?

2007-12-01T04:23:00.000-05:00

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.

Merchant Cash Advance Article In The Green Sheet

2007-11-28T18:45:00.000-05:00

Yes another article regarding selling a merchant cash advance appeared in the recent issue of The Green Sheet. Mike Evans, a Sales Manager from 2nd Source Funding in New York, wrote an article entitled Use rapport to score with cash advance. (Editor's note: Second Source Funding is a broker / sales agent for several merchant cash advance companies. I believe they also offer merchant fundings / business cash advances under the name Tribul Cash and BPS (Business Payment Systems) also based out of New York City.)

Mike points out several things that I've mentioned previously back in September, namely how former mortgage brokers are getting into the merchant cash advance business (see my previous blog entry - Invasion of the Subprime Mortgage Brokers).

I agree with what Michael is saying for the most part about how merchants are being inundated with merchant cash advance offers. The one interesting item he indicated is the average merchant cash advance factor rate is 1.38. My personal opinion, any merchant that is paying 1.38 for a cash advance can find the money less expensive for around 1.35 (which can add up to signficant savings to the merchant as the advance gets larger).

Merchant Cash Advance Companies Tightening Up

2007-11-19T21:48:00.001-05:00

I keep hearing more and more people talking about how merchant cash advance providers are tightening up their credit criteria and eliminating certain industries that they will no longer provide working capital to. I predicted this would happen months ago, it's the same old story, you can't stay in business funding bad deals. My next prediction, the sales commissions being paid out currently will go down. As many cash advance companies mature and review their financials / profitability they will see they can not turn a profit by funding this type of merchant and paying out the level of commissions that they have been. I've already seen in the marketplace several merchant cash advance companies telling agents/ISO/resellers that they no longer want their business and/or lowering their commissions.

Merchant Cash Advance For $1 Million?

2007-11-07T06:41:00.001-05:00

Merchant Cash Advances historically have maxed out in the range up to $150,000 - $200,000 per location, with the average amount being $20,000 - $25,000. There are a handful of companies now that are targeting a new market of $150,000 - $1 million+. These transactions are being structured more like a loan product, with closing fees and at a cost to the merchant comparable to hard money lenders. The credit criteria is much more stringent than a traditional merchant cash advance as the cost is lower. Sales agents shouldn't get excited too quickly, the commissions are typically much lower as well with this large advance product at a lower cost. The commission on a $1 million merchant loan product can be the same as a $200,000 traditional merchant cash advance. Providers of these high volume loans are betting that the bad debt will be lower because the cost is lower and the credit criteria is higher. Are they correct? They jury is still out and it will be interesting to see how this model evolves.

A little off the merchant cash advance subject - a ceremonial first pitch of the 2007 World Series - Boston Red Sox vs. Colorado Rockies

2007-10-31T23:27:00.000-04:00

While this particular post doesn't have much to do with the merchant cash advance industry (other than the fact that I'm the President & CEO of a merchant cash advance company), this was something I did that was too cool not to post the video, throw out a ceremonial first pitch for Game 3 of the 2007 World Series.

Merchant Cash Advance Blog - 2007 Industry Funding Estimate

2007-10-25T17:12:00.000-04:00

I have received several emails in recent weeks asking me what I think the current size of the merchant cash advance industry is. While there has been no formal report / survey ever conducted, I have done some informal research talking to several of the major players in the space (and have ideas of what most are doing) and I believe an accurate number for 2007 would be $1 billion in merchant cash advances funded in 2007. I estimate this number is up from $500 million in 2006 and will only continue to grow over time. Any feedback on this projection / estimate is welcome.

The story that doesn't want to die - the AdvanceMe Patent Invalidation

2007-10-24T15:27:00.001-04:00

Yet another industry article about the invalidation of the AdvanceMe patent. This one is titled Time's up for one cash advance patent and was featured in The Green Sheet and written by Adam Atlas. Editor's Note: Adam is an industry attorney and I've personally used him and highly recommend him.

Merchant Cash Advance Companies Coming And Going

2007-10-10T10:45:00.001-04:00

While a day doesn't go by that you hear stories of new companies popping up in the merchant cash advance space, I think you are also going to start seeing some merchant cash advance companies exiting the space and/or going out of business. For example, I've heard rumors that Acacia Funding has or is about to exit the merchant cash advance space.

I don't think most people realize the complexity and risk of this business. On top of that, companies are paying commissions out to brokers and agents that make it virtually impossible to turn a profit. Unfortunately some of these companies (and agents, brokers, ISOs that sell for them) will learn the hard way.

As an agent, you want to make sure you are working with a company that has the proper experience. High commissions by someone entering the industry may seem attractive, but a) it can't last long b) if they go out of business, you will most likely lose the backend residual associated with the deals you brought them.

AmeriMerchant has been in the merchant cash advance space for over 5 years and we have a very good understanding of what works and what doesn't and every indication shows by our explosive growth that we will be here for the long term. If you are a reseller / agent / broker for a merchant cash advance company, you want to make sure they have a viable business plan and they will be here for the long run too, unfortunately many will not.

Invasion Of The Subprime Mortgage Brokers

2007-09-27T23:16:00.000-04:00

With the subprime mortgage bust, it's only natural that thousands, if not tens of thousands of mortgage brokers around the country are having difficulty making ends meet. There appears to be an astounding number of mortgage brokers looking to enter the merchant cash advance space. In the past few months alone, I have received a plethora of inquiries from mortgage brokers looking to resell our merchant cash advance product.

While there seems to be some similarities between the subprime mortgage space and the merchant cash advance space, there is also quite a bit of difference. I am hoping the subprime mortgage brokers learned their lesson and will act responsibily when selling merchant cash advances by not taking advantage of the merchant (eg. charging closing costs, application fees, etc.). Acting responsibly will ensure that this is a viable industry that will benefit the merchants, the merchant cash advance companies and their agents for the indefinite future. There is enough margin in the product to go around without having to be a pig.

AdvanceMe Patent Invalidated - Cover Story of The Green Sheet

2007-09-16T17:30:00.000-04:00

The story of the invalidation of the "obvious" AdvanceMe patent just keeps on going. As I mentioned in previous posts, the New York Times wrote an article about it, University of Washington School of Law has made the story of the AdvanceMe patent invalidation part of the course curriculum for its Intellectual Law class and it has been the feature story of many publications.

Once again, the story behind the AdvanceMe patent invalidation is the COVER STORY of The Green Sheet, one of the largest credit card processing industry publications. The September 10, 2007 issue features the cover story, "AdvanceMe patent ruling opens merchant funding floodgates."

To update everyone on some facts since this article written, it indicates that the case AdvanceMe v. AmeriMerchant (the companion case to AdvanceMe v. Rapidpay) was scheduled to goto trial in January 2008. The article indicates, "experts predict it will be dismissed as a result of the August ruling."

Indeed this has already happened, the court dismissed this case shortly after the AdvanceMe patent was invalidated.

Two other items to point out about this article. In the print version of The Green Sheet September 10, 2007 edition page 67, there is a featured quote of the article that indicates:

"When you call someone and say, 'I'm being sued,' the first thing they think is, 'I don't want to get involved,' not 'Oh, I want to go through all my dusty old file cabinets,'

– Glenn Goldman
CEO, AdvanceMe

This is an actually a mistake as you can tell, that was actually my quote that appeared in the article earlier that they highlighted later saying it was Glenn Goldman that said it.

However, Glenn Goldman, CEO of AdvanceMe is quoted in the New York Times article and other publications as well as The Green Sheet as saying, "Although we feel vindicated that the court found clear infringement of our patent by each of the defendants, we respectfully disagree with the court's findings on validity."

That is not a typo my friends, Glenn feels vindicated that the court found that the defendants in the case infringed on an invalid patent that is unenforceable and OBVIOUS. Enough said......

New York Times Article On The AdvanceMe Patent Is Now Required Reading At University Of Washington School of Law

2007-09-11T11:30:00.001-04:00

It still amazes me the volume of ongoing positive response I received from the NY Times article that was published on the invalidation of the AdvanceMe Patent. Someone had sent me a link today that this article is now a required reading assignment in an Intellectual Property Law Course at the University of Washington School of Law.

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

2007-09-08T09:07:00.000-04:00

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.

New York Times - AdvanceMe Patent Invalidated - Extra, Extra Read All About It

2007-08-23T15:29:00.000-04:00

The news about the AdvanceMe patent invalidation has spread like crazy (Including internationally).

I thought the way all the prior art was gathered was a unique story and apparently the New York Times did as well. You can see the article written entitled Playing Detective In A Patent Case.

In addition, the Electronic Transaction Association (ETA), the leading industry association of the credit card processing industry has a link right off their "latest news" section of their homepage entitled, AdvanceMe Patent Ruled Invalid.

The Wall Street Journal wrote about the AdvanceMe patent invalidation and referenced the NY Times article specifically how myself, David Goldin, President & CEO of AmeriMerchant was instrumental in invalidating the patent.

The story was also the cover story of ISO & Agent Weekly. A link to the article can be found here.

Prepaid Trends (page 8 of this issue) talks about how the US District Court ruled the AdvanceMe Patent invalid and I am quoted in the article saying, "If AdvanceMe had won, it would have had a legal monopoly on a patent that was not a novel idea."

It has even hit the international press. The International Tribune published a story about how the prior art was found to invalidate the AdvanceMe patent.

Payments News mentions the New York Times article today.

The intellectual property legal community has even given the Merchant Cash Advance Blog credit in assisting the invalidation of the AdvanceMe Patent. The 271 Patent Blog recently ran a story about this case.

And speaking of the intellectual property community, Vinson & Elkins, our attorneys in this litigation have posted a news release about this case. I also wanted to take the time to thank the team at Vinson & Elkins for their extraordinary work they have done on this case. We couldn't have chosen a better IP firm to handle this matter in the Eastern District of Texas. My hat goes off to Bill Schuurman, Brian Buss, Joey Gray, Floyd Walker, Hilary Preston and Graham Sutliff for their work to invalidate this patent (And for their patience of putting up with a lot of smoke and mirrors thrown to us by the other side and their attorneys). If any one of you are lucky enough to be sued like I was over patent infringment (or if you are the holder of a legitimate patent that you are looking to enforce), I couldn't recommend Vinson & Elkins highly enough for all they have done not only for my company, but the entire merchant cash advance and credit card processing industry.

If you need to choose local counsel for the Eastern District of Texas, Potter Minton was our firm and my thanks go out to Doug McSwane and his team.

I have to give a very special thanks to Jeff Sanders of Roberts & Ritholtz. Jeff was not only instrumental in helping the defendants choose Vinson & Elkins as national counsel and Potter Mitton as local counsel, but provided strategy that was second to none throughout the case.

I also want to thank everyone that came to trial, namely Tim Litle, Larry Bouchard, Lee Suckow, Skip Landon as well as everyone that provided testimony in the case including the former AdvanceMe employees.

And finally, a very special thanks to those not named above that made it possible for me to be able to fight this fight, you know who you are and thank you.

AdvanceMe Patent Invalidated

2007-08-14T14:21:00.000-04:00

As many of you know, I have been involved with a lawsuit from AdvanceMe the past year and a half over their “patent.” They have sued my company and other merchant cash advance companies. Well, I am proud to say we just received word from the court that Judge Davis from the Eastern District of Texas has INVALIDATED the AdvanceMe patent in one of the AdvanceMe patent cases. He writes in his MEMORANDUM OPINION AND ORDER on August 14, 2007 in ADVANCEME INC. vs. RAPIDPAY, LLC, ET AL that “The ‘281 patent is INVALID because it is OBVIOUS and ANTICIPATED."

Judge Davis also wrote, “The Litle & Co. prior art, the LeCard program, the Transmedia program, and the prior art Reserve Accounts were all available in the field at the time of the purported invention. Johnson [-- Barbara Johnson is listed as the inventor of the patent --] merely implemented a predictable variation of these existing methods in establishing her invention. While Johnson’s work exhibits excellent entrepreneurship, it does not entitle AdvanceMe to a legal monopoly on this method of providing financing to small businesses. Rather AdvanceMe must continue to compete in the marketplace for its share of the market, which will benefit the economy and consumers as a whole.”

I believe this is also the first patent case in the Eastern District of Texas whereby the recent Supreme Court ruling on patent obviousness in the KSR Int’l Co. v. Teleflex, Inc. helped invalidate a patent. In reference to the Supreme Court ruling, Judge Davis wrote,"There are multiple prior art references, not considered by the PTO when issuing the patent,that render the patent invalid, especially in light of the Supreme Court’s recent ruling in KSR Int’l Co. v. Teleflex, Inc."

I would like to thank all of those that have helped me put together the information that was used to show the court that this patent was not a new and novel idea.

Any comments can be sent to dg@amerimerchant.com

AdvanceMe Patent Lawsuit - looking for Dining Ala Card Information

2007-08-10T00:30:00.000-04:00

As many of you know, AdvanceMe got a patent issued that is about a credit card processor paying someone other than the merchant to reduce an outstanding obligation. You can see more about it at:

http://www.google.com/patents?id=XwwWAAAAEBAJ&dq=advanceme

AdvanceMe has started to sue many companies including mine, AmeriMerchant. We are set to goto trial in January and have a deadline coming up with the courts in August that we must produce all information / evidence that we will be using in trial.

We believe that companies were performing this "invention" well before July 1997 when it was "invented." A patent becomes invalid and unenforceable if one can prove that invention was not novel at the time the application was submitted to the patent office even though it was granted by the patent office. Furthermore, if the inventor knew about similar / existing inventions and didn't tell the patent office then it becomes invalid as well and the plantiff (in this case AdvanceMe) can be liable for legal fees.

With that said, we have identified several prior art systems to invalidate this patent (if you know of any others, please feel free to email me at dg@amerimerchant.com. All inquiries will be kept confidential). One such system was Dining Ala Card that provided cash advances to merchants and was repaid out of a merchant's future credit card receipts (this took place in the early 1990s).

We are currently seeking "prior art" (printed publications, websites, marketing materials, merchant agreements, etc.) dealing with Dining Ala Card prior to July 1997. If anyone knows where to find (or has) Dining Ala Card marketing materials, agreements, merchant contracts, and/or knew how it operated, knew someone that will know how it operated, etc. please email me at dg@amerimerchant.com. All inquiries will be kept confidential.

If anyone had interacted with senior management at AdvanceMe prior to September 2005 and believes they knew about similar systems (eg. Clever Ideas, Transmedia, idine/Rewards Network, etc.), please please email me at dg@amerimerchant.com. All inquiries will be kept confidential.

If someone also knows about credit card processors paying third parties instead of the merchant directly before July 1997, please email me.

We believe we have a very strong case that this patent is not a novel invention and there were many lenders/creditors, etc. that were getting paid out of credit card receipts before July 1997 and if the patent office was told about these systems/companies by AdvanceMe during patent prosecution, this patent would never have been granted.

-David

Thanks & Ask The Blogger

2007-08-07T13:05:00.000-04:00

I wanted to thank everyone for all the positive feedback / emails I've received since launching this blog. This website has already been featured in many well respected industry publications including The Nilson Report.

My next entry I would like to answer some industry questions that might be out there. Please feel free to post your questions by clicking on the comments link below about the merchant cash advance industry or you can email them directly to me at dg@amerimerchant.com.

-David

Merchant Cash Advance Industry Has Become Mainstream

2007-08-03T14:03:00.001-04:00

Within the past two months, I've been contacted by reporters of a half dozen non-credit card processing industry publications such as big city newspapers, business magazines and local papers who are all planning stories on the merchant cash advance phenomenon. There seems to be a basic underlying premise of all these articles that there is a huge demand in the marketplace for this type of alternative financing as many business owners can not get financing from a bank.

I've heard many nay-sayers tell me that the merchant cash advance space is just a fad. My response to that is in 1995, when I first started my previous business an Internet development company, there was a gentlemen that told me the Internet was just a fad too (Note: I sold that business three years later to a multi-billion dollar telecommunications company). I hope the merchant cash advance industry grows to be at least 1/1000 of the "Internet fad."

Paying off existing advances

2007-07-31T07:03:00.000-04:00

One thing you will see very quickly once you begin selling merchant cash advance products is that you will come across merchants that are already in an existing merchant funding program. Similar to other financial products such as credit cards, mortgages, etc. there exists a large refinance model in the merchant funding industry.

What I mean by this is a merchant cash advance provider will provide a merchant who already has an advance with another provider the funds to pay off their existing advance and potentially have excess funds after paying off their balance. As someone who is selling this product you want to make sure that the merchant cash advance provider who is going to refinance the merchant, will pay the balance on the advance to their "last provider" directly and not to the merchant with the hope that they will pay the provider. The reason being is the merchant may not pay off their old advance and hence violate their contract by having two advances at once. In addition, you as the sales rep can potentially be liabile for something called "torturous interference" meaning that you knowingly helped the merchant violate its agreement with their original merchant cash provider.

The best way to avoid any trouble for the merchant, a sales rep or the new merchant cash advance provider is to ask a merchant if they are currently in a working capital program that requires them to either use a specific credit card processor exclusively or pay off their existing balance should they utilize another type of financing product after they got their initial merchant funding. (In almost all cases, the answer is yes). A responsible way to handle this is to ask the merchant for their current merchant cash advance statement which will show their balance and provide it to the new merchant cash advance provider that will be refinancing them. The new merchant cash advance provider should pay off the old provider directly and everyone will be happy and performing "best practices."

Never Use The Four Letter Word

2007-07-24T08:09:00.000-04:00

When you were child, you were probably taught to never use certain four letter words. In the merchant cash advance space, there is one word letter word that you never should be using when presenting this product to a merchant, "L-O-A-N."

Any person selling a true merchant cash advance product that is a factoring product, meaning you are purchasing a merchant's future credit card receivables at a discount, you need to understand the difference between a loan and a factoring product such as a merchant cash advance. (Note: there may be some "loan" products offered by companies to merchants that this article may not apply to, so I would check with your merchant cash advance provider whether or not they are offering a loan product or a factoring product. Almost every product I know of in the merchant cash advance industry with the exception of one or two is NOT a loan product). There are various state usury laws (usury is typically defined as the the maximum interest rate allowed by law) that a loan product must comply with.

The first distinction between a loan product and a merchant cash advance is there is no fixed time period with a merchant cash advance. For example, if you walk into a bank, every loan product they offer has a fixed time period - eg. a 30 year mortage, a 5 year auto loan, a 5 year SBA loan, etc. With a merchant cash advance, a merchant is simply agreeing to sell a percentage of their future credit card receivables at a discount and allowing a merchant cash advance provider to collect those payments by taking a set percentage of a merchant's future credit card processing sales. For example, lets say you purchased $20,000 worth of future credit card processing receipts for $16,000 from ten different merchants on the exact same day. And in this example, the agreement called for the merchant to collect 20% of the merchant's future Visa/Mastercard sales until $20,000 was collected and the advance was paid off. Each of the ten different merchants will pay off the advance in ten different time periods - one merchant may take seven months, another nine months, another twelve months, etc. Again, unlike a loan, there is no fixed time period with a merchant cash advance.

Another distinction between a loan and a merchant cash advance is there is no fixed monthly payment. A loan requires a fixed monthly payment amount (or in the case of some mortgages, a fixed bi-weekly amount). With a merchant cash advance, there is no fixed monthly payment as we are taking a percentage of a merchant's future credit card sales. For example, if a merchant's cash advance contract calls for 20% of their future Visa / Mastercard sales and they process $10,000 worth of these sales in Month 1 after taking the advance and $5,000 worth of future Visa / Mastercard sales in Month 2, then the amount they will pay back the merchant cash advance provider will be $2,000 Month 1 (20% of $10,000) and $1,000 Month 2 (20% of $5,000). As you can see, unlike a loan, there is no fixed monthly payment with a merchant cash advance. In addition to a legal difference, there is also a cash flow benefit to the merchant with a merchant cash advance compared to a traditional loan. That is, if their sales slow down, the amount they owe their merchant cash advance provider slows down since it's a percentage of their future sales that determines how much they pay back each month on their advance. With a bank loan, a merchant has to worry about making a fixed monthly payment to the bank regardless of how sales were that month. If they can't, they can default on their bank loan which can include the bank eventually foreclosing on personal assets that the borrower may have had to pledge.

Another difference between a merchant cash advance and a loan is there is no interest being charged with a merchant cash advance. A loan has an interest rate, while a merchant cash advance does not. A merchant cash advance involves buying future credit card sales at a discount. For example, if you are buying a merchant's future credit card sales for .75 on the $1, then you would purchase $10,000 worth of future sales for $7,500. You are buying these sales at a 25% discount, this is a discount (remember, this is a factoring product), not an interest rate. One of the reasons why there is no interest rate is because as discussed above there is no fixed time period to collect these sales purchased, it can take seven months, twelve months, fifteen months, etc. The time period it will take to pay off the advance is unique for each merchant as it is based on how much credit card sales the merchant actually processes
since they received the advance.

One of the key differences between a loan and merchant cash advance is their is no recourse with a merchant cash advance. One of the key attributes of a loan is there typically is a personal guarantee. A true merchant cash advance should be a purchase transaction and there is no recourse to the owner should they legitimately go out of business. With that said, this is not a free for all for fradulent merchants to take a cash advance and not pay it back. Most merchant cash advance provider contracts will have a fraud guarantee on the merchant personally. Some examples of a fraud guarantee where a merchant can be held personally liable are if a merchant misrepresented the information on their application that the merchant cash advance provider used to approve them, sells their business without paying off their balance on the advance, and/or disrupts the merchant cash advance provider's ability to collect the future credit card sales they purchased (this can be done by changing compatible processors, blocking ACHs, changing bank accounts, etc.)

In conclusion, when selling a true merchant cash advance product, you should be using the correct terminology such as "advance" instead of "loan" and "discount" instead of "interest." If a merchant asks you what is the difference, you should be able to point out the attributes of a merchant cash advance discussed above which are no fixed time period, no fixed monthly payment, no interest rate and no personal recourse.

To properly inform the merchant the type of product you are selling, I recommend putting a notice on your website, marketing materials, etc. that indicate it's a merchant cash advance. Something to the effect of "Note: This is a merchant cash advance factoring product and not a loan product."

Controlling The Cash Register

2007-07-22T11:25:00.000-04:00

Many people that sell cash advances have approached me and asked "what kind of business works best for this product." I think the best way to answer that question is by answering the question "what type of businesses don't work well with this product." What I mean by that is while every merchant cash advance provider has different underwriting policies, they all typically are purchasing future credit card processing receipts at a discount. And if a merchant cash advance provider continuously provides working capital to businesses where they can not collect those future credit card processing receipts, it's common business sense to realize that merchant cash advance provider will not be in business for long.

It would make common sense to market to industries that will have a higher and easier chance of being approved by underwriting. The number one type of business that I would avoid marketing to is one that can "control the cash register." (It's a term I used to describe when the merchant can easily advise on the fly to the customer what payment method to use - whether it's a specific credit card type, or even paying by check or cash). What I mean by that is most merchant cash advance providers are repaid by collecting a percentage of a merchant's future credit card sales. If a merchant can easily control the cash register, there is a greater chance they will attempt to defraud the merchant cash advance provider.

Lets take an example of two merchants, one is a home improvement contractor that only receives 2 credit card payments a week (batches out 8 times a month) and the other business type is a liquor store that accepts on average 40 credit cards a day (batches out 20 times a month). The contractor processes $60,000 a month and the liquor store process $30,000/month in Visa/Mastercard sales from their customers. The contractor's average ticket is $7,500 and the liquor store's average ticket is around $37.50. Now lets assume both merchant funding contracts of the general contractor and the liquor store indicate that the merchant cash provider purchased 20% of all future Visa/Mastercard sales until they are paid off. That would mean on average everytime the general contractor made a credit card based sale, the merchant cash advance provider would be entitled to $1,500 (20% of the $7,500 average ticket) and everytime the liquor store made a credit card based sale, the merchant cash advance provider would be entitled to $7.50 (20% of the $37.50 average ticket).

Now, lets keep in mind the $7,500 and $37.50 in each example due to the merchant cash advance provider everytime the merchant is supposed to make a Visa/Mastercard sale while I discuss "controlling the cash register." Because the general contractor typically only has one customer a day (if that) that is paying by credit card, isn't in a retail environment and typically isn't delivering the product to the customer right away (future delivery) they can easily say to the customer, "when the job is done, if you pay me with an American Express card or check I can deduct 10% off the price." What the contractor has done here is saved $750 in their cash flow(normally 20% of the transaction or $1500 would have been paid back to their merchant cash advance provider if a Visa/Mastercard was used by the customer to make payment), but instead $0 is paid back to the merchant cash advance provider because the merchant circumvented the system by advising the customer to use an American Express card. By doing so, the merchant "saved" $750 (they gave 1/2 in discount to the customer) in that case and in turn they are deceiving the merchant cash advance provider that previously gave them working captial. The merchant cash advance provider did not get the 20% of this transaction ($1,500) they were entitled to that would have went against the merchant's balance and to the merchant cash advance provider.

Now lets look at the liquor store example, typically it can be in a fast paced environment, people don't have checks on them, there is no future delivery (they customer gets the end product typically at the time of sale) and we have found merchants are less inclined to default on their agreement with their merchant cash advance provider in a low ticket environment to ask their customers to use a card other than Visa and Mastercard that would prevent the merchant cash advance provider from receiving their percentage of future sales they have made. They would have to do 100 defaults on their merchant agreement at $7.50 (meaning to instruct the customer not to use a Visa/Mastercard to make a purchase, but another credit card or payment type) each to equal the 1 time the contractor has to do it to bypass the $750.

To sum it up, if you are spending marketing dollars to market this product, the number one type of business I like to avoid are ones that meet the criteria of the general contractor mentioned above - large average ticket items, low number of batches each month (I typically consider low under 12- 15 times a month) and future delivery (where the customer is coming back in most cases and can prearrange a payment method).

With that said, you want to focus your marketing efforts on those businesses with low average tickets, batch frequently (at least 12 - 15x a month on average) and have no future delivery of their products/services - basically where the merchant can not "control the cash register."

Welcome to the Merchant Cash Advance Blog

2007-07-21T12:18:00.000-04:00

The merchant cash advance industry has evolved into a rapidly growing industry since the product was originally introduced almost twenty years ago by such pioneers as Litle & Co, Clever Ideas, and Transmedia (which merged / acquired companies like Dining Ala Card into what is now Rewards Network today, the former iDine). Today, there are estimated to be over twenty-five merchant cash advance providers and hundreds of agents, ISOs, and brokers offering the merchant cash advance product through various cash advance providers.

The merchant cash advance product has received even more attention recently as its "sister product" credit card processing is experiencing more competition than ever and the margins on bankcard aquiring are being squeezed tighter than ever. Furthermore, ancillary products to the credit card processing residuals such as selling / leasing of terminals which used to be an upfront cash flow stream for the ISO/agent is now almost non-existent with the introduction of industry wide free terminal programs. Due to a decrease in revenue potential in revenue for ISOs, agents and sales representatives in the credit card processing industry there has been a recent migration of these people entering the merchant cash advance space either as an "add-on" product or completely changing their business model to selling merchant cash advances full-time.

As more and more people are selling this product, capital is becoming more and more readily available to businesses nationwide that may not have access to traditional lending sources. Because a merchant cash advance is typically not a loan, but a factoring product because it's a sale of future credit card receivables, it allows for a provider an alternative underwriting method to provide working capital to merchants that may have not normally qualified for under traditional underwriting formulas.

It is estimated in 2007 alone that $600 million - $700 million worth of merchant cash advances will be provided to help grow tens of thousands of businesses nationwide. With that said, the marketplace has become extremely competitive. One example is on a recent trip to Texas I was dining in a small restaurant. I had asked the owner of the restaurant if he ever heard that he could get access to working capital by selling his future credit card receivables. His response was, "not only have I heard of it, I get at least four to five companies a week trying to sell this product to me in one form or another, either face to face, in the mail, or over the phone."

I have seen various posts / questions about merchant cash advances on various websites across the Internet including credit card processing sites, financing sites, etc. but no destination site that is exclusively dedicated to the merchant cash advance industry.

I hope this will be the beginning of what will be a destination site that will be informative and resourceful for those in the merchant cash advance industry. As President & CEO of one of the largest merchant cash advance companies in the industry, my goal is to take my five years of merchant cash advance experience to educate and inform those that are currently in the industry as well as those that are looking to enter the industry. As this website evolves, I hope it to be a resource for those currently working in the merchant cash advance industry as well as those looking to enter the industry. Items like industry trends, job boards, discussion forums, industry news, etc. will all be part of this merchant cash advance destination resource.

I also encourage you to email me with any questions, comments, etc. about this website and/or the merchant cash advance industry and I would be happy to answer them. I can be reached at dg@amerimerchant.com.

-David Goldin