Merchant Cash Advance And The Business Credit Crunch

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.

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

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.

Credit Crunch And The Merchant Cash Advance Industry

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.