Merchant Cash Advance Industry Update

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 Industry 2009 Year End Summary

'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.

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

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

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....

AmeriMerchant Launches Merchant Cash Advance Portfolio Servicing Program

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

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

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.

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!

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.

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

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 Association - Another Article In The Green Sheet

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)

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 Industry Comes Together

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

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 Rumor

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.

Accelerating Cash Advance

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.

Green Sheet Article - Sizing up Merchant Cash Advance

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

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.

Merchant Cash Advance Rumor

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

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

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...