All in The Family (The MCA Kin)December 20, 2015 | By: John Tucker
During the holidays we get together with our family to reminisce on the good times, celebrate achievements, and be thankful for life’s fortunate moments. Most of the brokers within our space have families of their own to tend to during the holidays, which might include a large family gathering with relatives flying in from outside of the area, or it might just include a peaceful dinner with a small assembly.
But this has surely been the Year of the Broker, and what many of these new entrants might not realize is that the product we sell all year round (the merchant cash advance) has a family as well. While the MCA doesn’t exchange “gifts” with its kin, it sure does have a lineage that dates back to the 1600s, which makes the product something born out of a family of products, rather than something that seemingly just sprung up out of nowhere one day in 1998, by a company formerly known as AdvanceMe.
ALTERNATIVE FINANCE AND PURCHASING REVENUES HAVE BEEN AROUND A LONG TIME
- (The 1600s): The product is nothing but a purchase of future revenues or receivables, where a merchant is going to sell their receivables or future revenues to a purchaser, with a particular factor rate or “discount rate” applied to the transaction. This act is nothing new at all, as it has been around since the 1600s but didn’t become more common practice until around the 1800s in terms of the United States.
- (The Middle Of The 20th Century): The MCA is an alternative finance option from more boutique/niche firms, compared to the traditional products of terms loans and lines of credit from retail banks and credit unions. Alternative finance as a “comprehensive term” has been used in a mainstream fashion since the middle of the 20TH century, so this “act” is nothing new.
- (The Newborn): In other words, the merchant cash advance product is just the most recent “birth child” from a long and storied “family dynasty” of alternative financial services and revenue purchasers.
The “family members” of the merchant cash advance include a variety of alternative financing vehicles that are popular and not as popular as others. For this article in particular, I wanted to discuss some of the more popular “family members” which include A/R Factoring, A/R Financing, P/O Financing, Equipment Leasing, Asset Based Lending and the Alternative Business Loan. This article will provide a general overview of each “family member”, which will serve as an introduction to a future article where I will go into specific sales strategies for many of the listings.
ACCOUNTS RECEIVABLE FACTORING
This product is based on a merchant having outstanding commercial receivables that are aged less than 60 – 90 days. With Factoring, the factor (buyer) is going to purchase the outstanding receivables from the merchant (seller), taking them off of the merchant’s balance sheet as an asset and onto the balance sheet of the factor. During the purchase, the factor advances about 80% of the amount purchased upfront to the merchant, with the remaining 20% coming after the merchant’s client base completes payment within 30 – 90 days, minus a discount fee of anywhere from 1% – 5%. Non-recourse factoring transfers the risk of the clients not paying the balances in full to the factor, while recourse factoring keeps the risk contained to the merchant.
ACCOUNTS RECEIVABLE FINANCING
This product is also based on a merchant having outstanding commercial receivables similar to Factoring, however unlike Factoring, there will be no purchase of the outstanding receivables but instead they will just be used as security/collateral for a financing arrangement.
PURCHASE ORDER FINANCING
This product is based on a merchant having outstanding purchase orders where a lender provides funds so a merchant can order materials to fulfill orders. Then once the orders are fulfilled, the lender collects a fee for service. This can also be done in the form of a vendor line of credit, where the lender opens a credit line with the vendor to allow the business to get materials needed to fulfill upcoming orders.
This product basically allows a merchant in need of commercial equipment, technology, machinery, vehicles, tools, and furniture, to lease it rather than buying, as certain pieces go obsolete rather quickly and wouldn’t make sense for purchasing. The merchants are provided lease factor rates based on A-D credit grades, with options at the end of the lease to buy the unit(s) for $1.00, give them back, or start another lease period.
ASSET BASED LENDING
This product is based on a merchant having a particular type of pre-owned asset of appraised value, that could be used as security/collateral for a financing arrangement. The aforementioned Accounts Receivable Financing product can also be considered an asset based lending product, but also included are pre-owned pieces of equipment which could be used for sale-leasebacks or other items such as luxury vehicles, real estate, precious antiques and jewelry.
ALTERNATIVE BUSINESS LOAN
This product is similar to the merchant cash advance, as it’s based on a merchant having a particular consistent amount of monthly revenue, and approved as a percentage of annual gross revenue. The product can come from lenders that also offer merchant cash advance products or lenders who solely specialize in this alone.
AS A FINAL NOTE, MAKE SURE TO REMEMBER THE MCA’S VALUE
While the MCA is the baby in the family, don’t let its “youth” undermine its value. An MCA could potentially cost more than a loan, but a merchant might not be eligible for a loan or a loan might not be available fast enough to take advantage of a market opportunity. Merchants might not have assets available for collateral, eligible accounts receivable, and they might not issue invoices to customers on terms. That means merchants might have better luck with some family members than others just based on their business model or circumstances.
Happy Holidays.Last modified: December 20, 2015
John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management and Journalism. Tucker has nearly 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking (here), or contact Tucker at Tucker@1stCapitalLoans.com or at 586-480-2140.