Who is Really Getting a Merchant Cash Advance?
August 23, 2011
You’ve seen ads like it before: “Get up to $250,000 for your small business today!”
For the local corner deli, that kind of cash may seem too good to pass up. There’s just one catch, many Merchant Cash Advance(MCA) providers cap funding approvals at somewhere in the range of 125% of a business’s monthly credit card processing volume. That means a deli processing $10,000 would be eligible for up to $12,500. ‘Mom and pop’ shops are often left wondering if anyone could ever really get $250,000 or if that figure is just a deceptive marketing gimmick.
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The Merchant Cash Advance Resource would like business owners to know that $250,000 is not only possible, but deals of this size and larger are made often. The typical recipients are retail chains and restaurant franchises, but any business generating enough volume in credit/debit card sales is eligible. If there was any doubt about the popularity or legitimacy of the MCA financial product, take a look at some franchise names that have used it:
- Burger King
- Domino’s Pizza
- Hooters
- Subway
- Dunkin Donuts
- Taco Bell
- Denny’s
- Wendy’s
- Meineke Car Care
- Maaco
- Aamco Transmissions
- Curves Fitness
This data was confirmed by researching UCC filings on AdvanceMe, Strategic Funding Source, Merchant Cash and Capital, First Funds, and Business Financial Services.
Every funding provider is not created equal. Some of the oldest players such as AdvanceMe, Merchant Cash and Capital, and Strategic Funding Source are capitalized well enough to do deals up to $1,000,000. Other firms specifically seek out larger businesses such as Bankcard Funding in Long Island, New York. According to a representative there, their average funded deal is $100,000. Others have a comfort range of $5,000 to $75,000 but will bring in outside investors if they need to go beyond that.
Merchant Cash Advance is not just for smaller businesses, nor is it a last resort source of capital. It is an established alternative to bank lending that offers incredibly flexible repayment terms. Despite the benefits, a MCA still has a reputation for being expensive. While we don’t dispute that, we do recognize the need for it. Unlike SBA loans which can carry default guarantees up to 90%, MCA’s are completely backed by private investors. There are no billions of dollars to fall back on, government backed guarantees, or bailouts when things turn ugly.
Over the past few years, some MCA firms simply weren’t able to generate enough profit and closed as a result. In the case of Global Swift Funding(GSF), a MCA provider that dissolved back in 2009, the return on investment simply did not prepare them for the loss they would realize from a very important client.
http://www2.ocregister.com/articles/gantes-money-million-2399154-bankruptcy-restaurants
John Gantes, formerly one of the richest Men in Orange County, California owned 110 restaurants throughout the western part of the U.S. As the economy turned sour, he reportedly started loading up on Merchant Cash Advance funding for each location. In the end GSF cried foul, but they could not sustain operations further.
There is risk on both sides of the equation. A MCA is not for businesses on the fritz, but rather is a tool to acquire inventory, new locations, upgrade equipment, get through a slow season, and grow. While much hype surrounds the minimal paperwork requirements for MCA, businesses seeking in excess of $100,000 should expect a more intensive underwriting process.
“Have detailed financial statements handy and expect some scrutiny of the Balance Sheet,” was advice offered by one underwriter. “We’re going to want to make sure you are using these funds for the right reasons.”
And yet the MCA industry stands by their mantra of making capital accessible to all. With funding amounts reportedly as low as $1,000, and more than 21,000 individual advances made in 2010 alone, there is really no better time for a small business owner to apply.
The funds are there but it’s important to set your own expectations of how much you can access. The corner deli should be able to put $12,500 to good use. Our experience shows that positive sales activity will probably make the funding provider more comfortable to extend a larger amount to you down the road. I think we’d all like to get $250,000 today but in the absence of government backed guarantees, a tumultuous economy, and jittery investors, you’ll need to get your foot in the door first and work your way up.
-The Merchant Cash Advance Resource
http://www.merchantcashadvanceresource.com
Images Copyright (c) of 123RF Stock Photos
Behind on Rent? It May be Too Late to Obtain a Merchant Cash Advance
August 23, 2011
There are numerous uses for a Merchant Cash Advance(MCA) but catching up on rent payments isn’t one of them. Growing a business can strain cash flow. Stretching out payment terms with vendors, overdraft charges, and pulling funds out of a personal account can tend to be part of normal operations. As long as this is ‘business as usual’, MCA Providers are readily available to provide funds.
Stretching out payments is one thing, but not making them at all is another. An underwriter shared this with us. “A restaurant in Arizona had been putting up consistent sales figures 6 months in a row, but they never had more than $100 in the business account. This would’ve been fine except they hadn’t paid their food supplier in 5 months. Before we could even make a decision on the account, the food supplier cut them off and filed suit against them. They had to close 3 days later.” There is a very clear line that defines what’s sustainable and what isn’t.
That particular MCA provider did not have a policy to conduct references with suppliers and had narrowly avoided what would’ve been an immediate default. When we mentioned that to the underwriter, he stated, “Well we do check to make sure they’re current on rent payments.”
That is one underwriting factor that is industry wide, the requirement to be current on business property rent payments. See… there’s a slight little issue that can impede a MCA provider from receiving their purchased sales, and that is if the business is kicked out by the landlord. Being current on payments isn’t scrutinized to the extreme, but rather put into the context of risk.
Making a payment on the 10th, when it was actually due on the 5th might make your landlord cranky but if you’ve been there long enough, there’s probably not any danger. Being one month late can also be accepted by an underwriter so long as the rent payment amount is not excessive. Tips from the underwriter, “If you pay $7,000 a month in rent and you are willing to take $6,000 in funding, we’re going to know most of that is going towards rent and wonder how you will be able to make the following month’s payment on your own.” On the other hand, some business owners have been at a certain location for so long or are so big, that being 30 days behind is business as usual. “If the business has been there 20 years and they make payments a month or two late every time, there really isn’t any indication of a negative situation. Also we’ve seen huge clubs that generate $400,000 a month but are sloppy with their books. These are the kind of businesses that will go 1-2 months without paying and then write out a check for the balance when they get around to it. It can freak out the landlord but as long as they bring in the cash, they’re not going anywhere.”
A general consensus in the industry is that being past due by 2 months and more enhances the risk significantly. Anyone can have a slow season or a bad month but there comes a point when the numbers stop making sense. If 2 months rent is $10,000 and a business sells $13,500 of their future sales today to obtain that $10,000, they’ll be caught up for now. But if the revenue being generated per month doesn’t increase, then they won’t be able to make the following month’s rent payment again. Therein lies the problem because not only is there another rent payment due but a percentage of their sales are going back to the MCA provider, amplifying the strain.
This isn’t to say that MCAs make problems worse, any type of funding would. You could give this same business a $10,000 loan with 0% interest payable in installments over 5 years and they would face the same dilemma. Unless sales improve significantly, there is nothing that can be done for them. Every business experiences a vulnerable phase but if it doesn’t make it over the hump, it’s probably time to call it quits.
Unfortunately, underwriters have encountered the late rent issue plenty of times in the past few years. These are businesses that were affected by the recession and have been on the decline for a long, long time. There are usually other factors that indicate financial stress by this point, such as poor credit. Our underwriting friend shared, “It’s tough to see that some businesses are 2 – 7 months behind on rent and are reaching out for anything at this point. If we approve them, we’re looking at a probable loss. We have applicants assume that since our funds are more expensive than a bank, we’ll pretty much tolerate any level of risk. That’s totally not the case at all. Unlike SBA loans, we have no government guarantees on defaults. We have to answer to private investors at the end of the day.”
MCA providers are only interested in transactions where both parties benefit. Acquisition and overhead costs are so high, that their model only works if they forge long term relationships with clients. There are some simple ways to start this off: Use the funds to buy bulk orders of inventory, advertise, upgrade equipment, make repairs, hire new employees, or open a 2nd location. This is the model that has propelled Merchant Cash Advance to the forefront of the small business world. It’s easy, it’s fast, and it makes sense for both parties. But there is one way to ensure a long term relationship does not happen and that’s if the front door is padlocked. Behind on rent? It’s probably too late…
-The Merchant Cash Advance Resource
http://www.merchantcashadvanceresource.com
Image Copyrighted (c) 123RF Photos
When Average Credit is Better Than Excellent Credit: Data Points
August 23, 2011
Back in the wild days of Merchant Cash Advance(MCA), credit score was not only unimportant to the underwriting process, but irrelevant altogether. Business owners with FICO scores reaching down into the 300’s were obtaining 150% of their monthly average processing volume without question. That era came to an end and with good reason. Defaults and losses soared and some funding providers went under. If ignoring credit had continued, it may have lead to the industry’s demise.
In some respects, MCA providers overcompensated by making credit score the only factor, rather than simply incorporating it into the complete underwriting analysis. “FICO Under 500? Declined”, “Less than 550? No thanks!” “Under 600, Don’t bother”. This became the status quo during the conservative years of MCA. And yet business owners with credit scores as high as 800 were ending up in default. After much head scratching, some underwriters began digging a bit deeper. A healthy community burns out all at once in February, an entire industry underperforms, historical cash flow activity predicts survival rate, multiple partner businesses do better than sole proprietorships… While these were just an example of conclusions that could be reached, they’re all potentially part of an underwriting system, a system built on data points. We found a great example on an old personal blog of Jeff Mitelman, the CEO of Canadian based funding source, Advanceit. To quote Jeff,
“Here’s a practical application of using data points:
Merchant A has a restaurant in PEI, below average credit, a maxed out credit card & has applied for a $25,000 advance in June.
Merchant B has a restaurant in Southern Ontario, excellent credit & has applied for $50,000 in January.
With this information alone, B is clearly the better decision.
Now consider this new insight into the transactional history of accounts with similar characteristics that only a knowledge base can provide Advanceit has funded 50 restaurants in PEI, 47 of which have repaid without issue. The two of the 3 that didn’t repay stopped transacting in January. The historical credit card sales of restaurants in PEI peek in July & hit their lowest point in December.
Advanceit has funded 25 restaurants in Southern Ontario, 18 of which have gone to collections, 10 of which had write offs below the funded amount. Of the 10 losses, 8 of them occurred in March. The historical credit card sales of restaurants in Southern Ontario peek in December & hit their lowest point in February.
When evaluating the same two merchants through this lens, A is a no brainer & B is a recipe for disaster.“
A lot of the veteran MCA providers already implement a type of data points system, whether it be an objective scoring model or something more subjective. With the surge of many small ISOs putting their skin in the game and funding their own accounts, this advice should be not overlooked. Without data points, you’re shooting in the dark. Do not forget that your data points need substance either. If the only account funded in the State of Wyoming defaults, that should not be sufficient to cast off all businesses in Wyoming.
Credit is not the only factor, nor is it a solid predictor of the future. It’s a solitary piece of the Merchant Cash Advance puzzle. Don’t believe us? Take it from Jeff, it’s a game of “Learning by Losing.” Do your best.
– The Merchant Cash Advance Resource
http://www.merchantcashadvanceresource.com
Image copyrighted by 123RF
A Merchant Cash Advance Company Says ‘Done Deal’
August 23, 2011
New York based Merchant Cash Advance(MCA) provider Merchant Cash and Capital(MCC) is putting their money where their mouth is and getting creative in the underwriting process. A far cry from black and white bank methodology, MCC has approved merchants whose businesses have been to hell and back. While financially sustainable in the long run, these merchants faced short term obstacles that required someone to dig deeper, try harder, and ultimately believe in them.
Coincidentally, we got ahold of this right after publishing an article that criticized ‘credit score only’ underwriting models (When Average Credit is Better Than Excellent Credit – Data Points). MCC offers proof of advanced analysis in a promotional flyer, titled “Done Deal.” The challenges include a restaurant that was temporarily closed, a movie theatre facing frivolous lawsuits, and a tough industry with declining sales. While we can’t comment on their success, it’s the kind of work that requires a big thumbs up from the small business community. Countless merchants have surely found themselves uttering these words at some point or another: “If I can just get the capital to get over this one small obstacle, I know I’ll make it. Who will listen to my story and help?” We urge these merchants to keep the faith and find a MCA provider that suits your needs.
It’s also worth mentioning that 2 of the 3 case studies offered by MCC were six figure deals. We recently singled them out as one of three industry giants (Who is Really Getting a $250,000 Merchant Cash Advance?) that were most capable of funding up to $1,000,000. Right on the mark and right on schedule, Strategic Funding Source, another New York based provider, announced the closing of a $4 Million deal just last week.
Remember where you heard it! The Merchant Cash Advance Resource is providing a play by play of an industry that is quickly gaining ground on their distant, overhyped challenger, SBA Loans. The gap is narrowing and businesses are benefitting. “Done Deal!”
-The Merchant Cash Advance Resource
No New SBA Loans Being Accepted. Don’t Understand? We’ll Draw You a Picture
August 23, 2011
On September 27, 2010, the Small Business Administration(SBA) temporarily sweetened the deal on the popular 7(a) loans. As part of the Small Business Jobs Act, government backed default guaranties rose to 90% and many of the major fees were waived.
By late December, the funds for this program had been fully allocated and exhausted. But the announcement was poorly communicated, resulting in thousands of unsuspecting bankers and applicants left stranded and confused. To deal with the drama, the SBA set up queues, where applicants were either placed on standby to take the place of a cancelled Jobs Act loan or to be transitioned into the regular 7(a) loan without the deal sweeteners.
But leave it to the SBA to underestimate the intelligence of their clients. Worried that bankers and business owners might not understand the concept of closing one program and offering them another, they drew a picture.
Actual image being used on SBA.gov to explain the status of Jobs Act loans
In case the phrase “No New Loans Being Accepted” is obscure and cryptic, we can decipher the message using the Daily Transition Phase Alert meter. It’s a state of the art, super genius meter, that was handcrafted by NASA scientists, and topped off with the modern pizazz of a traffic light. Green is GOOD. Red is BAD. Big dollar sign GOOD. Small dollar sign BAD. If the meter is yellow, speed up and try to beat the light but make sure there are no cops behind you first.
Bankers should start using this system en masse. Instead of an outright decline, they can simply inform applicants that their lending ability is in Phase Red. Persistent businesess can take their chances in the underwriting process and battle it out using the Daily Transition Phase Alert meter 2.0. Left foot on $. Right hand on. But watch out for blue because blue is very bad! Blue automatically allows the bank to raise your business checking account fees and increase your credit card processing rates.
The Amazing Daily Transition Phase Alert Meter 2.0!
While your bank is busy playing games with you (they’re not just mind games anymore!), alternative financial firms such as Merchant Cash Advance providers are busy funding applicants in less than 7 days on average. The process is easy, only minimal paperwork is required, it’s credit score flexible, and every business is doing it these days. Want to find out the status of your Merchant Cash Advance application? We’ll hand draw you a picture:
Choose your funding source wisely…
– The Merchant Cash Advance Resource
Banks Don’t Care About SBA Loans or Your Tax Dollars
August 23, 2011
Need proof the Small Business Administration (SBA) does more harm than good? The SBA has been protecting banks for decades against up to 90% of losses on eligible business loans. Funded by taxpayer money, it was designed to stimulate lending in the private sector. But banks have perverted the system and are using it as a literal blank check to commit fraud and reap profis.
With the Government footing the bill on defaults, banks have made it their business to make as many loans as possible to generate fees, regardless of whether or not the borrowers could repay. We have proof and it comes right from the source in a report prepared by the Office of the Inspector General.
MATERIAL DEFICIENCIES IDENTIFIED IN
EARLY DEFAULTED AND EARLY PROBLEM
RECOVERY ACT LOANS
Report Number: ROM 10-19
Date Issued: September 24, 2010
Prepared by the
Office of Inspector General
U. S. Small Business Administration
The Office of the Inspector General performed an audit on loans that had problems or defaulted especially early. On the sample they selected, it was determined that 82% of the loans should not have been made at all. From the report: “The audit identified material deficiencies in 32, or 82 percent, of the 39 early defaulted or early-problem Recovery Act loans reviewed, which resulted in the disbursement of approximately $5 million to borrowers who could not repay or were ineligible for the loans.“
82%?! And no, these loans were not flagged for technicalities, but rather for wildly incredible mistakes or intentional malice. This includes:
- Failure to request a business credit report on the borrower
- Using a borrower’s old credit report since a current credit report would make the applicant ineligible
- Using financial statements by the applicant that were more than 2 years old
- Not verifying business income
- Not verifying the age of the business
- Ignoring the borrower’s financial reports and creating their own figures that would make the applicant eligible
- Making loans to borrowers that did not even own businesses
- Failure to report fees both earned and paid for referrals to the SBA as required
An example: “One lender used 2007 personal income of $443,110 for a loan approved on April 13, 2009, even though the borrower noted annual income of only $750 on its April 1, 2009 loan application.”
As of June 30, 2010, there were a total of 484 early-defaulted or early-problem Recovery Act loans approved for $69,205,600. If the audit is any indication, it’s because 82% of the time, the banks just didn’t care. And why should they? The Government has only stepped up the effort to spur lending using this massively failed approach.
See more on that in our article, More Funding for Small Business Loan Programs – A Dysfunctional System
It may be interesting to note that while the traditional banking system is mired in corruption, an alternative financial product known as a Merchant Cash Advance (MCA) has been helping small businesses for years. With no taxpayer default guaranties, flexible terms, and an openness to borrowers of all credit types, it’s on track to become the most sustainable form of financing for businesses in the U.S.
SBA Loan vs. Merchant Cash Advance
Perhaps we’re a tad biased since we follow the MCA industry religiously, but one thing is for certain, don’t trust your banker for a second. They’re trying to pull a fast one almost 82% of the time.
– The Merchant Cash Advance Resource
How to Start a Merchant Cash Advance Company
August 23, 2011Originally published: 4/11/2011
One of our readers e-mailed us this question:
I would like to open a MCA company. What do I need and where do I apply ? Do I need permit, license or what? Where can I get the help and info?
– From: J.H.
=============
J.H.,
Are you looking to be the actual funding provider or a broker?
If you’re looking to be the provider, you should spend some time brokering the deals first. You need to get your feet wet and get the hang of what the business is all about. You will not the have the security that a bank has, such as collateral or a fixed payment schedule.
A summary of basic terminology and processes: ../../apps/wiki/merchant-cash-advance-wiki
Here’s what other companies require and analyze: ../../application%20process.pdf
You need to ensure that your contracts, agreements, applications, and marketing materials are consistent with the transaction being a purchase of future sales, not a loan.
Additionally, you don’t need to start a funding company from scratch. There are Merchant Cash Advance funding networks such as Colonial Funding Network that can provide everything you need, including systems, underwriting, and even a portion of the capital itself. You make the deal, they service the account.
We hope that helps.
– The Merchant Cash Advance Resource
Not an Expert in Payment Processing? Then Don’t Fund Merchant Cash Advances
August 23, 2011
If you have no experience in underwriting payment processing accounts, don’t bother becoming a Merchant Cash Advance (MCA) provider.
After a quick underwriting process, a MCA provider 
purchases Business ABC’s future card sales. Business ABC receives a lump sum of capital and a percentage of each card sale is now directed back to the MCA provider. Two weeks later, Business ABC loses a $2,000 payment dispute with a customer and suffers a chargeback. Unwilling to bear any additional risk, the payment processor terminates Business ABC’s account. Business ABC can no longer accept card payments. What does the MCA provider do?
Why did we hypothesize this scenario? Because this situation happens. The underwriting of a MCA doesn’t start with a credit score and end with a cash flow examination. The focus should be on the merchant’s future card payments. If the merchant’s ability to accept payments is at risk, then all the other factors aren’t worth diddly. You can have a client with 800 credit, processing consistent volume, have $50,000 in the bank at all times, and it just won’t matter. So what can go wrong? Your client’s funds can be frozen or their account closed in any of the following situations:
- The merchant processes a sale that is outside their approved parameters. For example: A restaurant has a $50 average ticket with a maximum allowable sale of $300. During the holidays they book a catering gig and attempt to swipe a $3,500 sale. BAD NEWS.
- The merchant is set up to swipe 95% of all card transactions but lately has been key-entering the card numbers nearly 70% of the time. BAD NEWS.
- The merchant you funded owns a retail store. His brother has a landscaping business. Occassionally the landscaping business will swipe cards through the retail store’s credit card machine and the brother will pay him the proceeds. If a business accepts payments on behalf of another business…. then BAD NEWS.
- The merchant has too many customers disputing charges. BAD NEWS.
- The merchant has insufficient funds in the bank account to cover the month end fees to the payment processor. BAD NEWS.
- The merchant processes payment far in advance of the services being rendered. BAD NEWS.
- The merchant’s average sale size is in excess of $1,000. BAD NEWS.
- The merchant swipes their own credit card through the terminal, effectively giving themselves a cash advance. This is illegal. BAD NEWS.
- The merchant has no refund policy. BAD NEWS.
- The merchant is processing with non-pci compliant equipment. BAD NEWS.
- The merchant changes their business ownership structure or legal entity type. BAD NEWS.
- The merchant takes payment for a prohibited item or service. BAD NEWS.
- The merchant has a security breach. BAD NEWS.
- The merchant violates any policy of their payment processor or payment network. BAD NEWS.
These are just a few situations that MCA providers need to be prepared for. One day everything is perfect and the next day their client’s ability to accept card payments is suspended or terminated. Historical statements can provide clues but anything can happen. A merchant with no chargeback history can have their account jeopardized with just one chargeback.
Alternative methods of collection such as direct debit and lockbox will be futile since they still depend on proceeds of payment processing. Simply speaking, if there are no more card sales, then you cannot recoup what you have purchased. And that’s the end of it.
It’s a risky business. MCA providers place an unbelievable amount of faith in their clients’ continuing ability to accept card payments. Rookies often comment that MCA providers are in a much better position to collect funds than a bank is on outstanding loans. This is outright false. A bank is entitled to payment no matter what happens to the business. Failure to pay a loan results in the reposession of collateral.
We have witnessed hundreds of MCA deals go south due to unforeseen payment processing issues. Being a funding provider may look attractive on paper, but if you think looking at the average sales volume, credit score, and cash flow history will get the job done, you’ll get smoked in this business. There’s a reason our site has two sections, Merchant Processing and Merchant Cash Advance. They go together. Don’t learn the hard way.
– The Merchant Cash Advance Resource
