Where Are We Now?

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How many firms are offering working capital now to small businesses with terms of 18 months or less? It’s more difficult now to estimate than it ever has been before. I’ve come across more new direct funders in the last 6 months than I have in the past 7 years combined. 7 years… and the industry is just starting to take off.

Back when alternative financing was dependent on merchant accounts, some degree of knowledge on the payments industry was required to be in the merchant cash advance business. That meant having split partners, downloading terminals, reconfiguring POS systems, and worrying about chargeback ratios. You didn’t need a license to lend because it wasn’t a loan. It was the wild west, an era when there were so few barriers to entry that it seemed like it would all come crashing down.

But it didn’t.

Today’s era of alternative financing has even fewer barriers to entry. Not many people predicted that things would move in this direction. You don’t need to know how to read a merchant statement or how to download a terminal. You don’t really need to know anything. Some funding companies are structuring their deals as loans and getting licensed where it may be required, but there’s a massive percentage of funders out there that are booking deals as purchases of future cash flows and this requires… nothing.

So how does one become a funder in 2013 and beyond?

  • Wake up
  • Get out of bed
  • ACH funds to a merchant
  • ACH funds back in accordance with the deal structured with the merchant

wake up, it's funding o'clock
Things can get taken up a notch by using a full-scale servicing platform like Capital Stack’s 1workforce or Benchmark’s MCA Track. And more deals can be done if you enlist a few friends and partners to participate in the funding of each deal so that you don’t run out of capital right away. Oh right, that’s the only barrier to entry. You need to have money.

There’s a reason I brought up Lending Club in a recent post. Their market is overlapping with ours… or maybe it’s the other way around. Merchant Cash Advance 2.0 has taken on almost all of the characteristics of peer-to-peer lending. According to Wikipedia, the key characteristics of peer-to-peer lending are:

  • it is conducted for profit; Same as MCA
  • no necessary common bond or prior relationship between lenders and borrowers; Same as MCA
  • intermediation by a peer-to-peer lending company; Several funders act as servicers in the MCA industry
  • transactions take place on-line; Some MCA companies are fully automating their process so that it can be transacted online
  • lenders may choose which deals to invest in; Same as MCA
  • the loans are unsecured and not are protected by government insurance; Same as MCA
  • loans are securities that can be sold to other lenders. Not sure about this one

Many are speculating that Lending Club will offer 3-5 year monthly repayment loans with an APR cap of 29.99%. That’s still a world apart from the 3-12 month daily repayment programs that are commonplace in the good ‘ol Merchant Cash Advance industry. I have no doubt that a turf war over top credit merchants is about to go down if it hasn’t already.

At what point will competing industries simply be considered one industry? I myself have been using the term alternative business lending for quite some time in lieu of merchant cash advance. To myself and to many others, merchant cash advance is a broad term used to describe short term business financing that is repaid daily. It might be a loan or a purchase. It might have fixed payments or variable payments. The net cost to the merchant isn’t likely to be wildly different. Even 6 month 1.15 loan deals are often layered with fees until the net costs exceed 1.30.

funding toothpasteBoth products compete head to head. We might as well be comparing Colgate to Crest. Do you want total ACH whitening or split-processing cavity protection? Either way, it’s going on your toothbrush. It’s not uncommon now for a buyer of future receivables to be licensed to lend in at least one state anyway. Lenders may be advancers and advancers may also be lenders.

A one-size-fits-all label is still hard for some to digest. Some lenders would rather die than be called a merchant cash advance company. Companies like Lending Club reaffirm my belief though that alternative business lending is the new best way to describe the broad spectrum of players regardless of how the deals are structured.

One of the most common questions I get it is, “how big is the merchant cash advance industry now?” It’s a very difficult question to answer. A couple years ago, I estimated that more than $600 million worth of future credit card sales had been advanced to small businesses in 2010 alone. Today that’s probably less than what Capital Access Network funds to small businesses in a year combined through AdvanceMe and NewLogic Business Loans. But should we count NewLogic? You see the question we should be asking is not, “where is the industry now?” it’s, “what is the industry?”

Some pick a term and run with it. According to ISO&Agent, Isaac Stern of Yellowstone Capital is sticking with merchant cash advance. That’s probably better than a rambling 4 hour monologue like I usually give when people ask what business I’m in. “I’m glad you asked, you see in 4000 B.C., the Sumerians would lend cattle in return for more cattle at a later date… often times a year out. But to truly understand my trade, we must revisit the history of ancient Greece…

I think when it comes down to it, there’s banks and then there’s everyone else. We’re everyone else, the Alternative Advance-to-Peer Merchant Lending industry. We fund small businesses because banks won’t. That’s who we are. Quantifying the annual funding volume is a different story, especially when all it takes to join this biz is to wake up in the morning, sell a deal, and wire out money. And that, my friends, is where we are now.

funding everywhere

Last modified: November 6, 2013
Sean Murray

Category: ACH Advances, business cash advance, Loans, merchant cash advance, merchant financing, merchant loans, MPR Authored