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!
Saturday, December 13, 2008
Thursday, October 23, 2008
Merchant Cash Advances And FICO Scores
It is interesting to see during this recent business credit crunch that the average credit profile for a merchant cash advance applicant is on the rise. We have seen a plethora of FICO scores in the 700s and even 800s which typically first seek traditional bank loans and credit lines before seeking alternative funding products such as a merchant cash advance. As I mentioned in my previous post, Merchant Cash Advance And The Business Credit Crunch, that the current conditions of the credit environment is an opportunity to introduce businesses to the merchant cash advance product that historically may have sought other options.
As I also pointed out previously, these better credit applicants will be less receptive to "cheap marketing" techniques such as voice broadcasting but require a more consultative approach about this product. There is an opportunity here that once the better credit score applicants are exposed to this product that they can use it in conjunction with traditional bank loan products once the credit markets eventually open up should the traditional product not be able to meet 100% of their needs. For example, a bank may only be willing to eventually give a business a $100,000 line of credit when they need $150,000 and this is where they can mix it with an additional $50,000 through a merchant cash advance. Time will tell, but I believe the average FICO score of the merchant cash advance customer will increase and remain higher once the credit markets / banks open up again to small businesses.
As I also pointed out previously, these better credit applicants will be less receptive to "cheap marketing" techniques such as voice broadcasting but require a more consultative approach about this product. There is an opportunity here that once the better credit score applicants are exposed to this product that they can use it in conjunction with traditional bank loan products once the credit markets eventually open up should the traditional product not be able to meet 100% of their needs. For example, a bank may only be willing to eventually give a business a $100,000 line of credit when they need $150,000 and this is where they can mix it with an additional $50,000 through a merchant cash advance. Time will tell, but I believe the average FICO score of the merchant cash advance customer will increase and remain higher once the credit markets / banks open up again to small businesses.
Monday, October 6, 2008
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.
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.
Tuesday, September 2, 2008
Merchant Cash Advance mentioned in MSNBC / Entrepreneur.com article
msnbc.com mentions the merchant cash advance product in a recently featured article entitled Control Your Cash Flow which talks about how businesses can reduce their vulnerability during this recent credit crunch. One of the ways it talks about how businesses can do this is to "Raise capital in innovative ways other than traditional banking." and specifically mentions about a merchant cash advance, namely "If you accept credit cards, there is something called a merchant advance where a third party will come in and review what your revenues have been and advance you capital today that you pay back in anticipation of future credit card receipts." This article appears to be syndicated from Entrepreneur.com and further backs up the idea that the merchant cash advance product has become a mainstream, accepted form of alternative financing for small to medium size businesses.
Monday, July 28, 2008
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.
Tuesday, July 8, 2008
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.
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.
Monday, June 16, 2008
Merchant Cash Advance Cost Comparison
I have received several emails about the cost of a merchant cash advance compared to other working capital solutions. One selling point of this product is that while it's more expensive compared to traditional small business loans (assuming the merchant can qualify for a small business loan as especially in this credit crunch, banks have raised their small business loan criteria even higher), the cost is pale in comparison to any equity solution including taking on additional investors and/or giving up equity in your business. Keep in mind that a merchant cash advance is not a loan product and does not have absolute repayment like a loan which also requires a MCA provider to charge more for that compared to a traditional small business loan. With a merchant cash advance, once you sell a MCA provider your future credit card / debit card receivables that is all the MCA provider is entitled to, no future upside in the business, no profit sharing etc. So what is more expensive? A) Selling your future credit card receivables / debit card receivables at an average discount of 26% or B) Giving someone a percentage of your business forever or until you have to buy them out a premium? I can assure you that option "B" will far exceed any discount that you sold your future credit card / debit card receivables for.
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