Merchant Cash Advance | A Look Back and Plan Forward

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looking into the futureMerchant Cash Advance is still a relatively unknown term and product to the masses, but amongst most of its target customer base, it definitely has a stigma that is rightly deserved in some ways, but I believe that it is also misunderstood in many other ways. Having been in the industry for nearly 10 years, I can say that I have seen my fair share of positive and negative events as they relate to the industry, but I believe that it has all been for its betterment and growth. Furthermore, by having been on the underwriting side for a majority of that time, I can say with great certainty that I have seen this product help several small business owners over the years, and it will continue to do so as the stigma fades away and acceptance increases.

For those of us working in this industry now, let’s face it – most small business owners that have taken a merchant cash advance or have been solicited for the product would much rather go to their bank for the money. The problem, as many merchants have come to realize in recent years, is that lending in general essentially dried up after the recession. The faucet is now running again, but small businesses were all but forgotten. Only the most well qualified borrowers are able to obtain the desired amount of capital needed at a reasonable cost through traditional bank loans. In addition to meeting all of the necessary criteria for a bank loan or line of credit, a borrower must also be prepared to wait months for the process to be finalized.

The days of a small business owner being able to go down to his or her community bank or local branch for a quick cash injection are long gone, but that’s where we come in. We are catering to a customer base that has been left out to dry. We are dealing in a marketplace that is grossly underserved by the larger financial institutions. We are charging a premium for taking on risk that most cannot stomach. We are keeping America running. That might sound ambitious, but is realistic when you put things in perspective.

SBA and IDC data show that small businesses employ at least half of the US workforce and produce anywhere from 60% – 80% of the new jobs annually while also accounting for nearly half of total US private payroll. As if that weren’t enough, small businesses also produce six trillion dollars or over 50% of all non-farm GDP in the US. When looking at additional SBA data which also states that more than 80% of all small businesses need to use some sort of financing to grow their business, it’s perplexing as to why banks have turned their backs on the people that have put America on their very own backs.

However, I do not want to go into great detail or make any assumptions on why “big banks” are not lending to small businesses. Rather, I would like to take some time to focus on how we can continue to support the growth of small businesses across America. The MCA product in particular has evolved quite a bit over the past 10 years, but a lot of that development has taken place in the past 3-5 years, and the industry has grown leaps and bounds as a result. When I started working as an underwriter several years ago, there were less than 10 lenders and 50 brokers operating within the space. Nowadays, there are hundreds on both sides of the fence, and there are multiple new entrants every day – senior guys starting their own operations, one man rogues from the insurance and mortgage businesses, consumer payday lenders, et cetera. – all looking for our piece of the pie, but who out there is really looking to improve upon and grow the product for the better?

small business financing growthI suppose therein lies the problem. Unfortunately, the tremendous growth we have recently witnessed also comes with a flood of unqualified and unknowledgeable management and staff that are simply following the direction of their unqualified and unknowledgeable employers. As an industry, if we expect to continue making headway in the small business lending environment, we must first better ourselves by taking the time to learn and understand the product in order to better educate our customers. If you know me, you have heard me say on a few occasions that it is easy to put the money on the streets, but the problem for most people is getting it back.

As with anything in life, you cannot jump into something and expect to master it. Over time, you get a grip of what you are doing, and you begin to build on that understanding. Therefore, no one should enter the market expecting to make huge returns without learning the ins and outs of the business. I, along with several of my peers, have seen plenty of well-intentioned but aggressive entrants “lose their shirts,” so to speak, because they did not do the proper diligence on the industry or the actual diligence required to operate within the space. Lending money with only a UCC-1 in place only on future receivables or sometimes no collateral at all is risky business as it is, but not taking the necessary steps to mitigate that risk is only asking for a rough road ahead – not only for the lender itself, but also for their potential clients, brokers, other lenders, and the industry as a whole.

Our underwriters and sales people, in addition to management, should have a solid understanding of the product they are working on. They should be able to educate customers as well as their peers. Transparency throughout the process is key for maintaining a long and mutually benefiting relationship with the client. By having this firm grip and understanding of the product, we reduce the risk of an unsatisfied customer. As with the mortgage and insurance industries, sales and underwriting must work together to determine the best possible result for both the client and the company. This is definitely a challenge for most groups due to the amount of balancing required to meet the needs of the company, but by establishing best practices and procedures in both the sales and underwriting processes, we can begin to think and work within separate verticals and group goals but streamline the process to achieve the agenda of alternative small business lending which should be to help provide small business owners with the fast and efficient capital they need.

Whether you have been in the industry for years, you have just joined this year, or you are considering taking the dive now, it’s only fitting that at this time of year we give thanks to those small business owners and celebrate their entrepreneurial spirits because they are the reason we, ourselves, are currently employed. But more importantly, they are setting us up for quite an adventure which will change the landscape of small business lending for good. I, personally, cannot wait for the next 3-5 years of continued growth because I can only see a bright future if we are able to collectively educate ourselves and pass that knowledge along to our clients. As long as the proper steps to learn have been taken, the competition from new entrants mentioned previously is also welcomed because this further drives new ideas and developments within the space – new financial products to offer clients, lower costs, and most importantly easier and efficient access to quick capital for the busy small business owners constantly on the go in an effort to grow their business while putting the rest of us on their backs.

Last modified: November 29, 2015
Andrew HernandezAndrew Hernandez currently serves as Managing Partner of Central Diligence Group. With over 8 years of alternative SMB lending experience, he has provided credit decisions on over $100 Million in SMB financing. Mr. Hernandez has implemented and developed new underwriting tools, policies, and procedures, as well as pricing metrics for companies to custom tailor programs for their clients. He has also written extensive proprietary training manuals that promote best practices and standards for both new underwriters and new sales organizations within the space. Contact him at

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