Merchant Cash Advance Industry is Waiting for its Big MomentAugust 25, 2011 | By: Sean Murray
Originally Posted 7/28/2011
According to an article in ISO&AGENT Magazine, the Merchant Cash Advance (MCA) industry has had significant success but “the companies that fund them acknowledge the cash-advance market is still waiting for its big moment.” This echoes our earlier opinion that a lack of collective marketing is keeping this financial tool from reaching its true potential.
How is it that in an ultra tight credit market that small businesses have not heard of MCA? With lax credit score standards, fast turnaround, minimal documentation, and a flexible method of repayment, it’s absurd that the industry has not reached so many that are looking to borrow. ISO & AGENT points to a negative image crisis and fingers the costs involved as a possible culprit.
The costs are a non-crisis. MCAs would be less expensive if they required collateral, perfect credit scores, fixed terms, ten years in business, and a 3 month underwriting process. If a small business meets those requirements and does not have a time sensitive opportunity they are looking to capitalize on, they should be going to their local bank. But most small business owners either do not meet that criteria or need the funds for a project they have going on today. Hence the product has to be more expensive for it to make sense for the firms providing the funds.
ISO&AGENT claims the industry has been compared to payday loans, an untrue characterization. In fact, that comparison has so rarely been made, that we can pinpoint the exact place they got that from. Inc.com published a very unflattering article on April 1, 2008 titled ‘Thanks, But No Thanks‘, in which they explain MCAs as “the business equivalent of a payday loan.” That was three and half a years ago! The article was not only biased and unfair, but was also written at a time when everything related to Wall Street, banks, or lending was being demonized as the nation sat on the verge of the Great Recession and economic collapse.
Still one can’t help but notice that buried deep within their criticism, is the answer to why MCAs are a tad bit more expensive:
The fact that collateral isn’t necessary is another important part of the MCA providers’ pitch. Entrepreneurs sometimes risk losing their homes if they can’t repay a bank loan, but they have no legal obligation to repay merchant cash advances if their companies fail, as long as they strictly follow the terms of the contract. They can’t encourage customers to pay in cash, for example, and they cannot switch credit card processors (typically, the MCA provider gets paid directly by the processor, rather than by the merchant). “If Diane’s Bistro goes out of business because Lauren’s Bar & Grill opens up across the street, we have absolutely no recourse to Diane, none whatsoever — as long as she follows the clearly defined covenants in our contracts,” says Glenn Goldman, AdvanceMe’s CEO.
And if you had any more reason to suspect MCAs are not as bad they tried to make it out to be, Inc.com published that article on April Fools Day. Case closed.
But there is indeed an image crisis and it’s that many businesses haven’t been exposed to the concept of MCA and thus cannot consider the pros and cons at all.
For instance: Most people can make the case for or against consumer payday loans. They’ve already got loads of information from the media, newspapers, banks, and lawmakers on which to base their argument. It’s become a well known household accepted form of financing. Whether or not payday loans can help the consumer is a separate debate.
That’s the difference. MCA is rarely spoken about by newspapers, banks, or lawmakers. Its presence in the media is limited and as a result we’re referring to stories published over three years ago. We have many friends employed as small business loan officers across the country and the only reason they’re aware of how MCAs work is because we told them. It’s embarrassing. And for an industry that funded over $500 Million last year alone, it really makes no sense. We blamed antiquated marketing techniques: cold calling, junk mail, useless internet marketing, and spamming. The industry has gotten lazy and has a propensity to market their financing to small businesses that have already secured a MCA. This comes with bold promises of lower rates and other gimmicks. This inner competitiveness leads to both smaller margins and lower conversion rates. It does nothing to grow the industry as a whole.
That’s complemented by carpet bombing the public with an approach their customers learned to ignore a long time ago. Cold calls and junk mail. Really? Yes, really. There will always be a sliver of effectiveness from these methods and the firms that employ them will defend their success to the death. These methods may score some deals and perhaps even work well enough to grow a MCA firm, but it will not lead to the industry’s ‘big moment.’ Same goes for internet spam, poorly constructed articles that serve no purpose other than to boost some company’s SEO, and useless blogs kept by both respectable firms and no-name websites set up to harvest leads. Sure that’s the way of things on the internet these days but there isn’t anything beyond that. There are no mainstream media articles about MCA, forums for business owners where it is actively discussed, nor any public endorsements by anyone of high political or business stature.
Sounds like we have an image crisis on our hands. The Merchant Cash Advance Resource (the site you’re on right now) has been in existence for 1 year. In that time, we’ve made significant additions to the information that can be accessed here. We constantly receive emails from business owners and MCA brokers alike with the hope that we can provide them with an unbiased answer. And guess what? We do just that. By having no commercial affiliation, we give the best advice we can. The e-mail volume has gotten so heavy that our volunteer editors have trouble answering them all. But we try anyway.
And along the way we’ve managed to get some formal offers to convert this resource into a commercial site to generate sales leads. A six figure buyout offer here and there coupled with some lengthy, legalese filled non-disclosure agreements. We say ‘no’ every time. The Merchant Cash Advance Resource is designed to provide information, opinions, critiques, data, guides, and an independent ‘thumbs up’ to an industry that’s destined to do great things for small business.
Why do we spend the time, money, and effort to provide this service? We’re looking at the big picture of MCA. Big picture… Big moment…
And we’re on our way.
Sean Murray is the founder of deBanked, an 11-year veteran of the merchant cash advance industry, a casual Lending Club and Prosper note investor, the co-founder of Daily Funder, an alternative lending speaker, consultant, writer, and enthusiast. Connect with me on LinkedIn or follow me on twitter.