The End of an Era
September 19, 2012It’s the end of an era. Sound ominous for a blog that reports on the Merchant Cash Advance (MCA) industry? It shouldn’t. In the last 10 years, MCA firms played in the minor leagues. No one was really paying attention to them and truthfully, a lot of critics didn’t think this business model would still be around. But today it still stands, funders are still funding, and this blog is practically struggling to keep up with the incredible amount of action that is taking place. Coincidentally, 2012 marks the end of the Mayan Calendar. Yes, it’s the end of an era.
MCA Goes From 0 to 60
There were a few big firms in the Mid-2000s (RapidAdvance, Merchant Cash and Capital, Strategic Funding Source, AdvanceMe, etc.) and they’ve all experienced modest success. It was “modest” in the sense that it is nothing compared to today’s standards. The level of play is changing. Wining and dining an Independent Sales Office (ISO) that could bring in $300,000 a month in deal flow used to be all the rage. 300k for one company was 300k less for a competitor. An extra point of commission here or a freebie approval there was enough to make you the big dog in town, at least for awhile. Despite all the supposed innovation and growth, the talent pool remained the same. Lead generators became agents, agents became ISOs, ISOs became syndication partners, syndication partners became funders, and funders became technology companies that were basically clearing houses for groups of funders. If the industry was Sally, Joe, and Tom in 2005, it was still Sally, Joe, and Tom in early 2011, just with new company names or titles. Then everything changed…
Money poured in:
Merchant Cash and Capital Announces $25 Million in new financing 10/4/11
Snap Advances raises $3 Million from TAB bank 11/21/11
Capital Access Network raises $30 Million 2/7/12
RapidAdvance Receives new financing facility through Wells Fargo 4/2/12
1st Merchant Funding | $5 Million re-discount line of credit from TAB bank 6/12
Strategic Funding Source secures $27 million 6/27/12
On Deck Capital raises $100 Million 8/23/12
Kabbage raises $30 Million 9/17/12
Industry insiders loosely redefined what a Merchant Cash Advance was:
Merchant Cash Advance Redefined Merchant Processing Resource 3/25/12
Big companies entered the market:
American Express Announces Their Own Merchant Cash Advance Program 9/22/11
PayPal Pilots Merchant Cash Advance Program in the U.K. 7/13/12
Some funders became licensed lenders in major states such as California:
A New Chapter Opens for Merchant Cash Advance The Green Sheet 6/25/12
Search the California licensed lender registry
New products formed:
FundersCloud creates platform to raise capital and find syndicate partners faster 8/29/12
A charity announces a new way to make subsidized business loans using the split-funding method 9/6/12
These barely scratch the surface of industry events. What used to be a competition to score the local neighborhood ISO has morphed into a race to be the first to partner up with Facebook, twitter, Groupon, and Square. Anyone not moving full speed ahead to integrate technology and social media will be gone in the next 24 months.
May 18, 2012 was the first time we noticed and commented on what was happening. In How The Facebook IPO Affects the Merchant Cash Advance Industry, venture capitalists and Silicon Valley had finally found MCA and there’s no hiding from them. Now it seems all of our far-fetched predictions are not only coming true, they’re happening moments after we predict them. In our last article we instructed everyone to keep their eyes on Kabbage. Six days later they announced they had raised $30 million in new financing and would be expanding overseas. For a company that makes wild claims about the correlation of facebook fans with account performance, all while humorously being named after a boring vegetable, they sure seem perfectly able to threaten the status quo. Nobody dared touch Ebay or Amazon businesses until they came around.
Price
On the cost basis front, the middle ground is eroding even further. We first discussed this phenomenon on April 25, 2011 in The Fork in the Merchant Cash Advance Road. In it, we explained that the combination of competition and defaults were placing downward pressure and upward pressure on price at the same time. Today, there is surging demand for “starter deals” at 1.49 factors that are payable over 3 months at the same time that more and more new lenders are offering 1 year loans at 10%. The low rate, 12-18 month term deals are nothing new. A few funders tried them in the past and most suffered irrecoverable consequences. This is history that the new players didn’t witness.
Some outsiders view the MCA industry as a bunch of Wall Street guys that got fat, happy, and disincentivized to lower costs. On the contrary, one only needs to take a single look at this chart to realize that undercutting the entire market isn’t so genius after all. How can a funder survive with extremely low margins when 15% – 71% of their target market is likely to experience problems repaying their loans? These aren’t our stats, these are FICO’s:
Veteran industry insiders know this and acknowledge that the coming tide of low rate financing is a bubble that has burst before. On the DailyFunder, a few folks have offered this insight:
The mca/unsecured loan biz is very risky. It’s all fun and games till deals start going south. My guess is they either adjust rates to match defaults or go out of business. I know first hand that this is not a get rich quick business. It may look like it is from the outside but once you are inside you see the world differently pretty quickly.
[these new low rate deals are] just like On Deck did. When they first came out, they offered 12 month 1.09’s. Then it dropped to 6 month 1.12’s, then 1.18’s. Now you see 1.25’s to 1.35’s offered by them
Governance
On the other side of the cost war is potential federal regulation. At least one D.C. consulting firm is prodding the leaders of the MCA industry to take a proactive approach on self-governance. According to Magnolia Strategic Partners, MCA is on the radar of regulators and members of congress, especially in light of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new MCA playing field has invited media attention, and not all of it is positive.
The North American Merchant Advance Association is the only organization for industry cooperation but their ability to dictate policies and standards is weak. They receive very little press and their website has been down for weeks. Many argue that they have been effective in minimizing defaults by sharing data on fraudsters. While this does stand to serve the community, it is but a footnote in their orignal intended purpose.
New Barriers to Entry
For the first time ever, potential resellers are facing barriers to entry. Becoming an ISO has long been as simple as owning a phone and purchasing a list of businesses that have used MCA financing before. Today, it’s not that easy. These lists have been sold literally hundreds of times over and called tens of thousands of times over. Pay-Per-Click marketing is dominated by the million and billion dollar firms with money to burn. If John Doe ISO wants to advertise on Google, he better be prepared to compete with the likes of American Express and Wells Fargo. Good luck! Putting skin in the game has also become more of a prerequisite for ISOs to succeed. Funders want to know if a sales agent would put his or her own money into a deal… and then actually commit them to doing just that. The odds are becoming stacked against the undercapitalized and it isn’t likely to change.
In 2009, the most prevalent pitch used by sales agents was to inform prospects that they themselves were “a direct lender” and that anyone else the prospect might be talking to was a broker. “Cut out the middleman and go direct with us,” they’d convincingly argue. This line became less effective when prospects heard this from all five agents they spoke to. Name dropping strategic partnerships will be the new way to build credibility. “We’re partnered with Facebook, twitter, Groupon, and Square,” a sales agent will soon be saying. “Can our competitors make the same claims? Go with us.”
See You On the Other Side
2013 will kick off a single elimination tournament. Funders that didn’t realize 2012 was the end of an era will begin to fade. 2014 will eliminate the weaker firms that remain and by 2015, Merchant Cash Advance will no longer be a term that anyone uses. Big banks and billion dollar technology companies will go on to rebrand all that which the funding warriors of the last decade have worked so hard to establish. MCA will simply assimilate into other financial products. The metaphorical Sally, Joe, and Tom will probably still be in the business, but be working for companies like Capital One, Wells Fargo, and American Express. And as for us…well… we’re going to need something else to talk about. But we’ll keep you posted until that day. 🙂
– Merchant Processing Resource
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8 Advances Are Better Than 1
September 11, 2012Things just got interesting. Your merchant processing $20,000 a month got approved for $26,000 and it was hard fought. Bad credit and some other issues would normally have forced this deal to go the starter route, but not this time. This time you can reflect back on the past few weeks of sweet talking the underwriter and know that it’s starting to pay off. Maybe it was the fact that you obnoxiously concluded every e-mail to him or her with a <3 or 🙂 just to make them feel extra special even if it was in response to a deal of yours they moronically declined.
I understand why you had to decline my client with 720 credit. We’ll get the next one! <3 :-)
And now this time you’re chalking up a tally on the closer board for a deal that shouldn’t have gotten done…that is until your client claims to have received a contract for $50,000 from another source. “There’s no way that can be true,” you tell them while rolling your eyes in frustration. This always happens at the finish line. Someone comes in and shouts out wild figures just to steal their attention away for a minute. But what if there really was a company offering 250% of processing volume to merchants who teeter on the subprime/starter threshold?
Sure there are ACH funders out there who will step in and say “based on their gross sales we might be able to give this merchant 500% of their processing volume!” and the like, but very few people are doing this from a split processing perspective.
We’ve been speaking with Heather Francis at Merchant Cash Group (MCG) and they plan to formally announce the details of their Fast Funding Equity program in the next couple of weeks. Without going into all qualifying parameters merchants must meet to be eligible, we’ve learned that these advances will be disbursed in 8 fixed monthly installments rather than the entire lump sum upfront. And that’s the catch. Under this program the merchant might be contracted for $50,000 but only receive a deposit for $6,000 today. However, there would be no future “renewal agreements” to negotiate or sign. Additional funds would be sprinkled into the merchant’s bank account on a near constant basis of every 6 weeks.
MCG might not win the deal every time with this program but they’re going to give a lot of account reps a run for their money. We all know the pitch of verbally promising additional funds in 3-6 months from the date of the initial advance, which is based mainly on hope that the account will perform and that the funder won’t play games. Put that up against 7 renewals in writing and it’s fair to say we’ve got a good match on our hands. There are some other special incentives for MCG account reps on the Fast Funding Equity program that are being leaked on the DailyFunder Forum.
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G-Day
Today was G-Day in the Merchant Cash Advance arena. GoDaddy.com’s servers were taken down singlehandedly by a jerk (let’s be real here) in the hacker group known as Anonymous. But this time we couldn’t all point and laugh like when it happened to Sony, Yahoo, or LinkedIn. No, this time thousands of MCA agents, underwriters, and staffers wondered why they stopped receiving e-mails after 2pm EST. This time Internet leads stopped coming in, internal databases stopped responding, and websites stopped loading. This time we learned that almost everyone uses GoDaddy for something no matter how much they brag about their systems and technology.
We didn’t take a poll of which companies were affected (we couldn’t because our e-mail was down!), but we did participate in the mass hysteria with several other people that were affected. As this very website went down around 2pm today, we lost contact with our database and e-mail servers. One ISO reported that their website, e-mail, and even their VOIP phones were down (You can have GoDaddy phones?). Another reported that their system was so connected to their GoDaddy servers that they couldn’t even print, scan, or fax! If you’re not a fan of Mondays, today was certainly a good day to make up an excuse to leave early. With systems crashing nationwide, chances are your stapler may not have been stapling right and your boss would have had no choice but to send you home.
Strangely, we have run into the hacker group Anonymous before. Back when they hacked Sony in 2011, they sent a 5 page blistering explanation of why they did it to the U.S. Federal Government. They included a link to our site on page 4 to an area that is now deprecated. That area outlined the basics of PCI compliance. For a week, our analytics showed that most of our web traffic originated from the Department of Homeland Security, Department of Justice, and the FBI. Boy, that was fun. Read that report and see our citation below:
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Who To Beat in 2012
“How’s your month going?” we asked. “Pretty slow, but that’s because it’s August,” said a lot of companies we spoke to. August is typically a slow month in the world of MCA. Account reps go on vacation, small business owners hit the beach, and America subconsciously puts everything on the back burner until after Labor Day. That was quite the opposite for 2 New York based MCA firms, United Capital Source and YellowStone Capital, both of whom reportedly broke single month funding records.
According to YellowStone Capital’s posts on LinkedIn, they funded $11,125,000 in August alone. With that, they gave a special thanks to RapidAdvance, GBR Funding, The Business Backer, Max Advance, On Deck Capital, Promac and Snap Advances.
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Add This To Your Data Points!
Companies that actively work to gain Facebook fans and Twitter followers are 20% less likely to be delinquent on their Merchant Cash Advance. Seriously. Kabbage, a company we mention in blurbs every so often operates independently from the rest of the industry by targeting e-bay sellers, independent Amazon stores, and social media retailers. Some people feel that they are not a serious challenger to the status quo and that their tactics, methods, and headlines are merely shock value fodder for the rest of us to laugh at while we all rant and rave about ACH deals being the hottest thing since Square. The founder of twitter (Jack Dorsey) started Square and it has completely disrupted the payments market that quite frankly was used to disruptions until Dorsey turned everything upside down. We believe Kabbage is a company everyone should keep an eye on.
On another note, our favorite part of Kabbage’s recent press release is actually the level of interest banks are expressing in their business model.
While the firm said it is open to establishing alliances with credit unions, banks have expressed more interest in seeing how they can leverage the technology platform to serve its customers.
-Kabbage
Fresh off our rant about John Tozzi’s recent article in BusinessWeek that concluded Wells Fargo was essentially evil for being involved with MCA companies, we’ve become suddenly self-conscious of what journalists might think. Little do they know that America’s big banks have been joined at the hip with the MCA industry for a while now. Banks are still lending to small businesses, we’re just all doing it on their behalves. TRUTH!
– Merchant Processing Resource
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Funding Floodgates Reopen
September 20, 2011If you’re a business owner, it’s time to get ’em while they’re ~HOT! Small business funding is BACK and more available than they’ve been in years. And guess what? Because we’re just a news site, we’ve got no reason to douse you with a cheesy sales pitch. There’s a lot of money out there right now and that’s the truth.
Merchant Cash Advance (MCA) continues to dominate the alternative financing market but a few new options are changing the landscape. You might call them ‘alternatives to the alternatives’, deals that are based on MCA but have all the bells and whistles of a loan; Fixed time frame, a payment schedule, and even personal guarantees! The underwriting criteria generally requires a set of recent healthy bank statements and semi decent credit credit (yes, your credit still matters) to qualify. Beyond that, it’s up to the individual lender to present their respective checklist of closing documentation. This usually includes some combination of a business property lease, applicant ID card, business permit, and a recent tax return. That’s it. Oh, and the wait time? Expect a week long process if you’re quick on the draw with paperwork.
Two years ago, there wasn’t much variety in the MCA space. Business owners could shop all they wanted but the underwriting and cost structures were essentially identical everywhere. Now there are factor rates that range from from 1.20 to 1.65. It’s more merit based than it used to be. The higher credit rating, stronger cash flow businesses can earn something better than the one-size-fits-all 1.35 factor rate of yesterday. On the same token, the complete credit averse can grab a shot at financing too, but at a steep price.
But there’s more to it than just cost, there’s also the setup:
Don’t want to switch your merchant account?
Stay where you are: There’s a significant chance your merchant processor already has a contract with the MCA provider you’ve chosen. Often times your sales representative may encourage you to open a new merchant account for the lower discount fees and to have a higher degree of control if problems arise. Ultimately, a new merchant account is not essential if you want a MCA.
Leverage your strong cash flow history: If you’ve managed to keep a large positive balance in your bank account for the last few months, your MCA provider could simply extract the agreed percentage from there, rather than directly through the merchant account.
Lock it up: A Lockbox provides the MCA provider with peace of mind by obtaining their payments without the risk of Non-Sufficient Funds from the debit method but also allows you to keep your merchant account. It’s frequently used as a compromise for businesses that are legally prevented from changing their merchant account(i.e. franchisees), but are too cash flow weak to qualify for direct debit payments.
But the buck doesn’t stop at the many ways you can do MCA. You’ve got options!
Merchant Loan: An actual loan based on your credit card sales history. A percentage may still be withheld from each card sale but a periodic or an end-of-term lump sum payment will be applied as needed to ensure the loan is completed within the time frame allotted.
E-Bay/Amazon Loan: Get a loan based on your sales history on Ebay.com or Amazon.com. The largest lender of this type is Kabbage.
Cash flow loans: We described these in the 2nd paragraph. Expect cost ratios from 1.12 to 1.55 and term lengths between 4 and 24 months.
How can you find the floodgates?
You can refer to the directory of direct MCA providers but can check out alternative lenders such On Deck Capital, ForwardLine, Kabbage, and Sure Payment Solutions if you want to diversify your options.
Kennesaw based funding provider, AdvanceMe expects to fund $1 Billion in the next two years. That’s nearly as much as the entire MCA industry did in the last two years combined.
2009 was a year full of “I should’ves” as in “I should’ve obtained financing before the financial crisis.” Cash is finally available to small businesses again and although it is more expensive than it used to be at the local bank, there may never be a time where the process is this quick, approval is this easy, or where your credit score is weighted this lightly. We’re not the salesman here, just the messenger. If there was any project you were remotely considering, now is the time to make a move… Don’t wait until the funding levees have been restored.
– AltFinanceDaily
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Merchant Cash Advance Diminished by Growth of Payment Technologies
May 15, 2011
Technology will be the end of us all
When bank lending dried up, Merchant Cash Advance (MCA) providers fulfilled the need to keep America’s small business owners going strong. By withholding a percentage of each credit/debit card sale automatically, there was no need to worry about a client’s ability to make payments. Without the risk of late payers or non-payers, MCA providers singlehandedly eradicated credit score from the underwriting guidelines. Or so they thought.
Only a small percentage of businesses in default actually close their doors. Circumventing the MCA provider’s merchant processor or incentivizing customers to pay with cash are issues that have plagued the industry for years. While this would constitute a clear breach in the sale of one’s future receivables, it’s not always a deliberate act of malice. However, there is a direct correlation between the frequency of breaches and *surprise* declining credit score.
But in the instances without malice, such as if damaged POS equipment prevents the flow of processing, there’s not much a MCA provider can do other than help fix it. These gaps in collection affect the bottom line and lead to upward pressure on costs or tighter restrictions on approval, two outcomes that nobody wants.
And as if there already wasn’t a strain, changes in payment technology are quickly eroding the MCA industry’s turf. The credit/debit card sales of a business aren’t exactly limited to one of these:
Now there are options, lots of them. In today’s world you can accept electronic payments with almost anything, a conundrum for MCA providers aiming to collect a percentage of all of it. And how about those routine PCI compliance upgrades? There are countless businesses with a basement full of old credit card machines that could be plugged back in, put back into service, and freely used to circumvent their financial obligations.
Take this clothing retailer for example. She qualified for an advance of only $5,000 but when it came time to convert the merchant account, the process wasn’t so easy:
Nearly all of the transactions conducted inside the store happen through the touch screen POS. The merchant statements reflect consistent historical sales of nearly $4,800 per month, instilling the belief that the future won’t be much different. But when the customer lines get too long, there’s a backup credit card terminal that they pull out from under the counter that still has an active account with a previous processor. Around the holidays, they dig out the old Tranz model terminals from the basement and use them too. For street fairs and trade shows, they attach their Square to their iPhone and process on the go. And when it comes to their website and Ebay, PayPal is their preferred method of payment.
This doesn’t mean the touch screen POS won’t continue to see $4,800 worth of action per month, but the situation doesn’t inspire a lot of confidence if the goal is to collect a percentage of their credit/debit card sales. What if they occasionally use Square inside the store? What if phone orders are punched into PayPal? These things may happen inadvertently or simply because their customers demand it.
To firmly secure a purchase of future sales, the MCA provider would need to do the following:
- Convert the touch screen POS system (which will very likely come with a fee from the POS reseller)
- Reprogram their backup terminal
- Reprogram all the old terminals collecting dust in the basement
- Force the return of the Square and replace it with their own iPhone processing attachment
- Delete PayPal from the HTML of the business’s website
- Instruct them to stop conducting business on Ebay
- Cancel the PayPal account altogether and replace with an authorize.net virtual interface or something equivalent
That’s a lot of effort for $5,000 but doing anything less is a gamble. That’s another reason why MCAs are more expensive than bank loans. Without set fixed payments, they are extremely vulnerable to economic ups and downs and now the explosion of payment alternatives.
Rather than stay ahead, the industry is becoming more fractured as evident by the rise of new funding sources such as Kabbage, that lends against future PayPal sales. It’s innovative but vulnerable. Kabbage depends on the success and status quo of PayPal for survival, a characteristic that is not likely to carry them far. Similarly, MCA providers are dependent on withholding a percentage of future sales, an uneasy task in a world where the point of sale itself is changing.
Innovation in the MCA space has gone as far as automated bank debits and a lockbox. One depends on the merchant’s use of a single bank account and the other is equally exposed to the issues we’ve discussed.
Which of course begs the question: If electronic payments are becoming more elusive to capture, how can the MCA industry survive? The obvious answer is to transform the product itself into a loan. Secure it against collateral and have the credit bureaus at your disposal. Breaches will become far less likely and electronic payments less elusive when there are actual consequences involved. It’s a dreaded word and one MCA representatives have spent years avoiding, but according to the state of California, it’s probably a loan already anyway.
As MCA providers struggle to keep up with payment alternatives, banks are wondering when we’ll all wake up from the “it’s not a loan” euphoria. If the goal is to provide capital and get more back, reprogramming a terminal isn’t going to cut it. How many free hours can America Online offer to bring people back to their dialup internet service? Technology changed and the age of AOL ended. So too may the age of Merchant Cash Advance…. at least in its current form.
– The Merchant Cash Advance Resource
