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

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.

Merchant Cash Advance Industry Update

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

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

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

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

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