Merchant Lending: The Evolution (Feedback)March 13, 2013 | By: Sean Murray
The Inefficient Merchant Lending Market Theory got a lot of responses across social media sites and e-mail and I believe that some of them out to be echoed here for all to see. Feedback and debates are good because it allows everyone to know how the industry is actually thinking. Here are some snippets of what was said:
Frank C: I think that the pragmatism of healthy business practices sometimes collide with the emotion of the sales process and when that happens the industry suffers. This is an emotionally charged–sales driven– industry and when companies are willing to “fund all deals” something will go wrong. The history of this industry is well documented by the failure of the “bring me all deals” model.
Robert S: After almost 40 years years of commercial finance, including as a factor, I’ve seen the same thing and highly recommend a strong Chinese wall between sales and credit.
Matt F: The conventional wisdom of the industry has been to keep the deals as short as possible to minimize the risk of default. This ignores the impact to the merchant over the long term… By making the terms longer, there is a lower risk of hurting the business therefore making the default rate lower.
Rodney B: After 6 months or less the client has gone thru all the funds and no access to additional funds and too far away from paying 50-80% of the MCA off, so they do the unthinkable.
A few soundbites I came across also seem to suggest that it may be time to drop the MCA name, especially since there are now funders offering products that are strikingly similar to a bank Line of Credit. I’m kind of thinking this may be the way things will turn out and I’ve said so in The MCA Industry is More Fractured. The name hasn’t been the same since February 2009 anyway, at least that’s what Google tells us based on search volume:
There are some that believe that the industry has stuck to short term deals for so long because the margins and annual return on them are just so darn good. Booking incredible yields with low defaults probably makes it easier to attract VCs, hedge funds, and other investors, so why screw it all up?
Lots to think about!March 13, 2013
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.