Merchant Cash Advance Misinformation Abounds – What’s A Broker To Think?
Last week, at least two panelists at the major commercial loan broker conference critiqued merchant cash advances, even going so far as to assign an arbitrary cost to them. Craig McGrain, President of factoring company Durham Funding, said they cost about 75%. Bob Coleman, owner of The Coleman Report, an SBA loan journal, said that merchant cash advance contracts should stipulate that prices are basically equivalent to 100% APR. Neither accurately describes a merchant cash advance if for no other reason than because a merchant cash advance is merely a methodology or a mechanism, not a price. The term itself is derived from the process of making a merchant an advance on their future projected sales. With hundreds of companies employing that concept, some are able to do it at a low cost and others at a high cost.
And it’s obviously the high cost ones to which their disdain was directed. But even then, when MCAs are properly structured as a purchase of future sales, there is no calculable APR because there is no assigned time frame, predetermined payments, or interest rate. This doesn’t mean an MCA product can’t be expensive, because surely they can be, but assigning randomly high percentages to scare people only compounds the misinformation that has persisted for years.
On a panel I participated in with Bob Coleman, Coleman said that these purchases were really just loans. The New York Supreme Court, however, repeatedly disagrees with him. In Platinum Rapid Funding Group Ltd v. VIP Limousine Services, Inc. and Charles Cotton, the court affirmed a purchase of future receivables for an upfront payment, adding that the request for the Court to convert the Agreement to a loan and assign an interest rate to it would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.
In Merchant Cash & Capital, LLC v G&E Asian Am. Enter., Inc., the court reached the same conclusion.
With regard to McGrain of Durham Funding, he said that 70%-80% of companies that apply for his company’s factoring services have already used an MCA. This kind of competitive pressure is probably a leading reason why a factor would mischaracterize MCAs. In fact, the factoring industry has felt so threatened by MCAs, that two years ago the International Factoring Association voted to ban all MCA companies from their organization.
This isn’t to suggest that factoring is an inferior product and that MCA is the newer better thing. On the contrary, factoring is an excellent loan alternative and to McGrain’s credit he said that he believed the free market would work everything out. To facilitate that, more MCA brokers need to be educated on factoring and SBA lending. And in return commercial finance brokers need to understand the true nuts and bolts of MCA. That process gets sullied when misinformation abounds. Merchants will get the best help when the brokers fully understand all of the market’s options.
My panel with SBA lending expert Bob Coleman and equipment leasing veteran Kit Menkin at the NACLB conference last week highlighted some differences of opinions across these closely related industries but also demonstrated areas in which we all agree. Small businesses have different needs and it’s up to the brokers to prescribe the most appropriate solution. Whether it’s short-term or long-term, cheap or expensive, proactive or reactive, there’s capital out there. Hopefully the kind of cooperative engagement the NACLB conference provided this year will continue to be fostered for years to come.