Merchant Cash Advance Providers Cope with New Business Failure Rate
“Why can’t I get a better deal? I’ve been in business for 9 months already!”
Is this you?: Your doors open, you bring in customers, and revenue is pouring in. It seems like your business plan was right on the mark and there’s no doubt things will continue as is or get better. For cash flow or expansion purposes, you seek out a loan or line of credit.
Your bank shuts you down and not because they weren’t impressed with your business, but because they require a minimum of 3 years in business. So what to do now?…
While banks can only sustain a certain amount of risk, a Merchant Cash Advance(MCA) provider can fill the gap by purchasing the future credit/debit card processing transactions of a business. It’s a solid capital source for an old company and a perfect fit for a new one. But even they have a risk threshold.
YIKES! 25% 1st year failure rate, 50% 1st year failure rate, only 1 in 3 survive, 9 out of 10 are gone in first two years! Despite the wide inconsistencies, it’s enough to rattle the underwriters of MCA providers across the country. As a result, the majority of Merchant Cash Advance(MCA) providers require a full year of operation before being eligible to apply. Some buck the trend and there’s a reason for it.
Statistics claiming a failure rate of 50-90% for small businesses seem to be largely overexaggerated. Unfortunately, these figures have caught on as fact and are quoted, requoted, reported, distorted, and multiplied. It’s discouraging and yet millions of people start a business every year. Here are some verifiable and credible stats:
U.S. Department of Labor: 24% of all businesses started in 1992 had failed by 1996
Amy E. Knaup, Bureau of Labor Statistics: 34% of businesses fail within the first 2 years, 56% fail within first 4 years
Score.org (Official partner of Small Business Administration): Reported in Nevada that 50% of all new businesses fail within 2 years
The data reflects the survival rate of businesses started in the 2nd quarter of 1998. Leisure and hospitality is the category most suited for a MCA and 20% of them failed within the first year.
Business Owners: There is no such thing as a low interest business loan, as we presented in a previous article. Some MCA providers are purchasing about $14,000 worth of credit card receivables for a price of $10,000 today. That’s a cost of $4,000. Think about it this way: If someone gave you $1, could you turn it into $2? If someone gave you $10,000 could you turn it into $20,000? If you believe in your business, then you will create repeat customers.
A $10,000 investment in advertising immediately brings in $12,000 of sales. At first glance, the $4,000 cost on $10,000 from a MCA does not seem worth it. However, the repeat business comes into play. If only half of them come back a second time, then your return becomes $18,000 ($12,000 in sales the first time, and $6,000 the second time).The return on your investment grows for as long as any one of those customers continues to do business with you in the future. $50,000 in sales over the course of a year can be the result of an initial $10,000 advertising campaign. Is it worth it now? absolutely!
Strangely, some business owners still balk because the cost is higher than their expectations. As Americans we have a tendency to believe that anything above 10% is too high. We could be poised to make 500% of our investment and still don’t want to pay 40% for the funds to make it happen.
It’s a pyschological thing. As business owners, we want a 5% interest rate but don’t consider the fact that interest rates that low only exist with taxpayer guarantees. We want a loan from the bank but don’t consider that our collateral (house, car, furniture, future paychecks, spouses belongings) will be reposessed in the case of default. And we want the bank to approve us even though all data indicates that out of the 100 businesses exactly like ours, 20 of them will fail in the first year.
Let us remind you that most MCAs are uncollateralized, are only repaid at the pace that revenue is generated, are not taxpayer subsidized, and available despite the high failure rate for new businesses. In the spirit of a fair deal, it doesn’t get more fair than this. Entrepreneurs are fortunate to have access to capital but if you can’t envision turning $1 into $2, maybe starting a business wasn’t such a good idea…
– The Merchant Cash Advance ResourceLast modified: February 21, 2013
Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.