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
Merchant Cash Advance and Startup Businesses
October 20, 2010
Kudos to the entrepreneurs taking a chance in the worst economic period of modern times. Starting a business is already a truly challenging task in itself but before we shower you with praise for being the ultimate warrior of capitalism, let’s put everything into perspective.
Risk takers are a minority in today’s startup community. A persistently high rate of unemployment is breeding a culture of survivalists; Individuals that have been pushed to the limit via pay cuts, layoffs, and robo-signing foreclosing bankers. It’s resumé rejection, employer double talk, and anger at how Wall Street bankers continue to live. The new entrepreneurs are a resounding chorus of “If I can’t get a job, I’ll make my own job!” These people are going for it on 4th Down and Long and running it up the middle for a touchdown. It’s as if Charles Darwin spiked their Corn Flakes.
Startup survivalists are just as inspiring as their risk taking counterparts. Both groups have the drive and that’s essential. But you can’t forego some basic tools. Financing is a must. No capital, no business. Unless you are fortunate to start with deep pockets, you need access to cash.
New businesses are not likely to be offered credit terms by vendors, nor can you push back overhead expenses such as rent, until you’re generating revenue. If unforeseen demand overwhelms your capacity, a cash shortage can do irreparable damage to your success.
Rather than spew rhetoric about the importance of funds, and shortchange you with a bullet point list of vague sources whom in reality are so illiquid, they’re not actually viable, we’ll offer our real 2 cents.
Banks. For a startup? Not happening. Angel Investors and Venture Capitalists? Slim to no chance. Unless these private investors live in your community, they’re not going to invest in your business. More than 90% of startups fail. For an investor to take that much risk, they’re going to do some hands on management or want to follow you around and critique how you’re spending their money. That’s not necessarily a bad thing. It just means that one can’t reasonably expect a return on their investment without intimate knowledge of the demographics and community the business is situated in.
Looking for private investors over the internet? Don’t. Your pro forma financial statements, data research, and business plan won’t help. Do you know how many businesses fail to open even after they incorporate, sign a lease, purchase inventory, advertise, and make preliminary hires? An astounding number are eclipsed by failed health inspections, license/permit rejections, and building code violations. This reasserts that unless an investor is personally intimate with your progress, the odds are stacked against them.
Lastly, you need not pay to get approved for capital. We’ve spoken with many start ups over the last year and are flabbergasted by the amount of new businesses that are convinced they have to pay a $3,000 upfront fee to get approved for a loan. The ones that actually pay are quick to learn what town the lender is based in; It’s called Scam City.
Real Option? Merchant Cash Advance. A Merchant Cash Advance offers a business with a lump sum of capital upfront. In return, a piece of every sale the business makes will go towards paying it back plus a predetermined fee. There is no due date or set term for repayment. That means if sales are slow to get off the ground, then funds will be repaid slower and with no penalty.
A Merchant Cash Advance provider entrusts you with their capital because of the unique security the repayment method offers. The business itself must accept credit cards as a form of payment. The credit card processing company will automatically deduct the agreed percentage piece of each sale transacted and forward it to the Merchant Cash Advance provider on your behalf for repayment.
A startup can qualify with as little as 1 week in business. As long as you open, you can get funding. Credit can play a limited factor and the cost can be hefty, but the access to capital is unmatched. From the date you apply, funds can be received in as little as 5 days.
Purchase inventory, pay the rent, advertise, hire, or seize an opportunity. Whichever shortcoming you face, it can be overcome with a Merchant Cash Advance. Industry experts project that funding is on pace to reach over $600 Million for 2010 alone. With advances ranging from as small as $1,000 to as high as $500,000, there is proof that numerous deals are being made every day.
We’ve seen the same books, guides, and expert advice columns that you’ve seen and all of them seem to be a reprint of useless suggestions like the SBA and searching for angel investors online. These people earn a living writing. Whether or not the money expert column in your newspaper actually helps you, makes no difference to them. We have many years experience in the Merchant Cash Advance industry and we make careers out of funding you, not telling you about funding.
We try not to promote any one company over another. There is no harm in enlisting the service of a middleman or reseller for one of the direct funding sources. It may actually benefit you. If you are open for business, you can obtain a Merchant Cash Advance. If you have been in business for a long time, a Merchant Cash Advance is still a fantastic option.
It’s 4th Down and Long. You’re ambitious, focused, and ready. You are the ultimate warrior of capitalism. A Merchant Cash Advance will supply the cash. Grow, take risks, survive, and don’t be surprised if your Corn Flakes taste funny.
