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

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

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

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 Market Size - Part 2

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?