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 Industry Affected By The Subprime Mortgage Bust?

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.

Invasion Of The Subprime Mortgage Brokers

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.

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

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.