By: Sean Murray
Every time we post a decent article, we get tons of e-mail responses.
- “Great job on this.”
- “You left out ACH Advances…”
- “You understated funding by a couple BILLION dollars…”
A lot of them refer to our continuous omission of ACH advances, financing programs that aren’t based on credit card payments. In our opinion, this was not an omission but a reflection of our opinion that these weren’t even Merchant Cash Advances (MCAs) at all. MCA had always been the sale of future credit and debit card revenues. A business was Advanced Cash based on their Merchant account activity and a percentage of those transactions would go to the funding provider to recoup their purchase.
But popular opinion has caused us to rethink the concept entirely and even led the MCA masters to ask themselves the most basic of questions: What is a Merchant Cash Advance?
The term has been semantically broadened to include many short-term financing alternatives that have nothing to do with merchant accounts at all. Some of us have even been caught uttering that four letter word (LOAN). The word ‘lender’ is tossed around very loosely on the online MCA Forums, causing some industry veterans to cringe at every post. In the years of MCA past, these semantic assaults would not fly. (Read David Goldin’s lecture on the subject from 2007).
Loan. Loan. Loan. Guess what? Sometimes it’s used in the right context. In 2012, Merchant Cash Advance is many things and some of it isn’t even determined by the funding providers at all, but by the states. According to Thomas Bonneau at ForwardLine, “Depending on the state, the financing is technically either a loan or merchant cash advance, but the mechanics of the financing are the same as an MCA regardless.”
And then there’s On Deck Capital, a company that has specialized in microloans exclusively since 2006 but is almost always mentioned in the media along with MCA companies no matter how much they try to distance themselves from them. And what about these ACH advances that some companies are doing? Are these advances based on total sales also MCAs?
We believe the term can be applied however one wants as long as they are consistent in their language. If the contract defines it as a sale, then one must never say loan. It’s perfectly acceptable to refer to apples and oranges as fruit, but you would never describe an apple as an orange. The same applies to MCA.
A simple redefinition of what MCA is could triple the industry’s annual volume. Capital Access Network (CAN) alone is on pace to do as much business as the rest of the entire industry does in merchant account advances combined. According to Alan Nussbaum, a Business Development Manager at CAN, they expect their firm to fund more than $700 million in new deals in just this year. That figure would of course be spread between their operations at AdvanceMe and NewLogic Business Loans. Leave it to AdvanceMe, the oldest MCA player in the bunch to stay ahead of the curve and capitalize on the market that does not qualify for MCA or does not want it. But they are not alone.
A Merchant Cash Advance For All
Critics used to describe MCA as a fad, phase, or a temporary fix. We don’t hear from them much anymore. The Merchant Cash Advance concept has worked and prevailed, so why was it being limited to businesses that processed at least $5,000 a month in credit cards? That question has been asked in boardrooms, by hedge funds, by private investors, and of course by the business owners themselves for the last few years. Everyone reacted in a different way.
1st Merchant Funding took the ball and spawned an entire niche market known as starter advances, in which business owners processing less than $5,000 or with FICO scores below 500 would be given the opportunity to get small rounds of funding. Yellowstone Capital ventured into ACH Advances (Cash Flow Advances) that are based on the total gross sales of the business. No credit card processing is even required. Other companies followed suit and today MCA is fighting on the same turf as On Deck Capital and American Express. We discussed this multi-dimensional evolution back in April, 2011. We believed that MCA was struggling to find its identity:
We’ve come to the fork in the road for what the Merchant Cash Advance industry seeks to brand itself as. Loan alternative? First choice? Backup plan? Is it for smaller businesses or larger ones? Should it go the way of lending or continue to remain a structured purchase of future card sales?
We’ve finally got our answer. It’s everything and then some. But something else happened along the way too. The type of businesses that can apply has expanded. Restaurants and retail stores are great but now every business is fair game. Ignore the restricted industry list that has been collecting dust on our website. It’s sooo… 2010. If you own a legal business and there is consistency to your monthly cash flow, you’re a candidate for a Cash Flow Advance! While there are particular differences between funding providers, the implications are the same. There are likely a million small businesses out there that qualify for it and have been waiting years for financial support. While funding companies have spent millions in advertising to draw in prospects for merchant account advances, Cash Flow Advances seem to be selling themselves.
According to David Rubin, the CEO of Capital Stack, there is overwhelming demand for advances based on total sales. “80% of our portfolio consists of Cash Flow Advances,” said Rubin. “Any business and any SIC code is a candidate. We’re really excited to be able to support the small businesses that haven’t had options in a very long time.” Capital Stack is also a syndicating partner of Colonial Funding Network, a platform that pools funds together from multiple sources. Syndication is not necessarily new, but the technology and reporting behind it have advanced significantly.
Everybody is a Direct Funder
A large part of why deals are reaching gargantuan sizes of $751,000 is because the risk is being spread across multiple parties. Years ago, it was all about labels. You were either a direct funding source or a reseller. It was common for direct funding sources to attack resellers to win prospects by characterizing them as brokers that charge extra fees. In our experience, the overall cost of the advance was the same no matter which venue the business owners chose. Many resellers fought back by representing themselves as being direct and today that’s usually true. Resellers are commission driven but they can leverage their earnings by funding a portion of a deal themselves. This has been going on for more than five years but it was held back by antiquated systems.
Funding providers would receive a percentage of credit card sales on a daily basis but syndicating partners would receive a payment once a month or worse, after the deal had completed. The rate of return was stacked in the funding provider’s favor since they could reinvest every dollar every day. Reporting was nil, if at all. Syndicating partners would at best receive a monthly report in excel, an e-mail with some totals, or stranger yet, random deposits with no explanation or information on the deal’s status and performance. Who would want to invest their money like that?
Colonial Funding Network is run by Strategic Funding Source and it allows multiple parties to syndicate a single deal at once, regardless of whether or not they played a hand in originating it. For example:
Funding Provider A, Funding Provider B, Reseller 1, and Reseller 2 are all part of the network. Reseller 1 brings a deal to Funding Provider A. Funding Provider A likes the deal but enlists Funding Provider B and Reseller 2 to fund small percentages of it.
The risk gets spread around and everyone gets a chance to leverage their earnings. For the syndicating partners that differ drastically in size, it’s a symbiotic relationship. A small syndicating partner with no advertising budget can participate in deals originated by a partner with an unlimited budget. The big partners get to spread their risk around with the small partners and fund more deals as a result. Everybody wins.
Technology and Reporting Create Opportunities for Growth
It’s important to mention that Colonial Funding Network offers real time online reporting to all of its partners AND daily deposits. There are no questions left unanswered, no major drawbacks for syndicating partners, and no trust barriers. It’s all there in real time for everyone to see. It’s so efficient and transparent that it makes the whole syndication market seem new. According to Evan Marmott, the Senior Vice President of Sales for Strategic Funding Source, “You can be a lot more confident in the decision to approve a deal if the reseller is willing to fund a percentage of it too.” On the same token, these same resellers can be a lot more confident their money will be managed properly when there is a technology and trusted brand name behind it.
But Colonial is not alone. Other industry giants such as 1st Merchant Funding and Merchant Cash and Capital have been keen to the potential in syndication for awhile. 1st Merchant Funding has aggressively advertised Powerforce 2.0 as the hottest database in the industry. We’ve gotten a nice preview of what Powerforce is like from the reseller’s perspective and its reporting features are amazing. Clean charts, graphs, and easily printable reports in PDF come standard. And of course, they offer daily deposits. Merchant Cash and Capital also offers online reporting to their syndicating partners but is going a step further to personalize it. According to Seth Broman, the VP of Business Development there, “We will be releasing a specific syndicator access to our system in a few weeks.”
Must All Resellers Also be Funders?
The only drawback the syndication revolution has had is the pressure it’s putting on the mom and pop resellers and agents. Some are complaining that there is becoming an unrealistic expectation to share in the funding. If Funding Provider A asks Joe The Reseller if he’d be willing to fund 10% of a $50,000 deal and he refuses, the funding provider may believe that Joe may be withholding negative information about the deal or have doubts about it. In truth, Joe the Reseller simply might not have $5,000 to invest in that deal or any deal. We need to realize that the MCA industry is so decentralized that stay-at-home moms, part time agents, and resellers that are barely scraping by have no ability to syndicate and even if they could, probably shouldn’t. This isn’t 2007 anymore when all of the resellers were well capitalized financial gurus in New York, California, and Florida.
If something unusual happens to the advance, funding providers can already assess a commission penalty, which means if the account defaults within the first thirty to sixty days, the commission can be taken back or the residuals put on hold. You either trust a reseller or you don’t. If you don’t, then why do any business with them at all? If you’re putting up 90% of the funds, why should 10% make you trust somebody you don’t trust? These are difficult questions but the ability and willingness to syndicate definitely provides an edge.
The New Standard is Merit
Your Merchant Cash Advance might be a sale or a loan. It might be funded by one company or five companies. Your credit card sales might matter or they might not. You can get as little as $1,000 or as much as $4 million. The conclusion is that MCA is shedding labels. It cannot just be expensive, for individuals with bad credit, or just for businesses doing more than $5,000 in credit cards. MCA is simply becoming synonymous with short-term financing. What the terms and costs are depend solely with the company offering capital. Which means if you’ve heard of MCA and didn’t qualify, thought it was too expensive, or couldn’t get enough money, it’s time to go back and try again.
MCA companies aren’t giving away money but they are making rational, sound decisions to invest in healthy businesses that want support. It’s a merit based system. Will this market ever go bust? It’s hard to argue that merit could be a fad, phase, or a temporary fix. It’s the standard and it should’ve always been this way. The Merchant Cash Advance industry is rebuilding the economy brick by brick and dollar by dollar. It might not matter if banks ever lend again, unless they join in this market themselves. Our new prediction: A major bank or financial institution will enter the MCA market within the next 18 months. Start the countdown and in the meantime start getting funded. If you own any kind of small business, you qualify!
Last modified: March 13, 2013
Sean Murray is the founder of deBanked, a 9-year veteran of the merchant cash advance industry, an advisory board member on the Coalition for Responsible Business Finance, a casual Lending Club and Prosper 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.