Gold Rush: Merchant Cash Advances Are Still Hot

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This story appeared in deBanked’s Jul/Aug 2019 magazine issue. To receive copies in print, SUBSCRIBE FREE

Last year, when Kevin Frederick struck out on his own to form his own catering company in Annapolis, the veteran caterer knew that he’d need a food trailer for his business to succeed.

He reckoned that he had a good case for a $50,000 small-business loan. The Annapolis-based entrepreneur boasted stellar personal credit, $30,000 in the bank, and a track record that included 35 years of experience in his chosen profession. More impressively, his newly minted company—Chesapeake Celebrations Catering—was on a trajectory to haul in $350,000 in revenues over just eight months of operations in 2018. And, after paying himself a salary, he cleared $60,000 in pre-tax profit.

But Frederick’s business-credit profile was so thin that no bank or business funder would talk to him. So woeful was his lack of business credit, Frederick reports, that his only financing option was paying a broker a $2,000 finder’s fee for a high-interest loan.

Luckily, he says, everything changed when he discovered Nav, an online, credit-data aggregator and financial matchmaker.

Based in Utah, Nav had him spiff up his business credit with Dun & Bradstreet, a top rating agency and a Nav business partner. This was accomplished with a bankcard issued to Frederick’s business by megabank J.P. Morgan Chase. Soon afterward, he says, Nav steered him to Kapitus (formerly Strategic Funding Source), a New York-based lender and merchant cash advance firm that provided some $23,000 in funding.

“They led me in the right direction,” Frederick says of Nav. “A lady there (at Nav) helped me with my credit, warning me that the credit card I’d been using had an effect on my personal credit. Then she led me to Kapitus, all probably within a week.”

chesapeake celebrations trailerNow, Frederick has his food trailer. He reports that its total cost—$14,000 for the trailer, which came “with a concession window, mill-finished walls, and flooring” plus $43,000 in renovations—amounted to $57,000. Equipped with a full kitchen—including refrigeration, sinks, ovens, and a stove—the food trailer can be towed to weddings, reunions, and the myriad parties he caters in the Delmarva Peninsula. In addition, Frederick can also park the trailer at fairgrounds and serve seafood, barbeque, and other viands to the lucrative festival market.

Meanwhile, the caterer’s funders are happy to have him as their new customer. The people at Kapitus, to whom he is making daily payments (not counting weekends and holidays), are especially grateful. “Nav provides a valuable service,” says Seth Broman, vice-president of business development at Kapitus. “They know how to turn coal into diamonds,”

Nav does not charge small businesses for its services. As it gathers data from credit reporting services with which it has partnerships—Experian, TransUnion, Dun and Bradstreet, Equifax—and employs additional metrics, such as cashflow gleaned from an entrepreneur’s bank accounts, Nav earns fees from credit card issuers, lenders and MCA firms.


The company has close ties to financial technology companies that include Kabbage and OnDeck, and also collaborates with MCA funders such as National Funding, Rapid Finance, FundBox, and Kapitus. “We give lenders and funders better-qualified merchants at a lower cost of client acquisition,” says Caton Hanson, Nav’s general counsel and co-founder, adding: “They don’t have to spend as much money on leads.”

As banks have increasingly shunned small-business lending in the decade since the financial crisis, and as the economy has snapped back with a prolonged recovery, alternative funders—particularly unlicensed companies offering lightly regulated, high-cost merchant cash advances (MCAs)—have been piling into the business.

And service companies like Nav—which is funded by nearly $100 million in venture capital and which reports aiding more than 500,000 small businesses since it was founded in 2012—are thriving alongside the booming alternative-funding industry.

Over the past five years, the MCA industry’s financings have been growing by 20% annually, according to 2016 projections by Bryant Park Capital, a Manhattan-based, boutique investment bank. BPC’s specialty finance division handles mergers and acquisitions as well as debt-and-equity capital raising across multiple industries and is one of the few Wall Street firms with an MCA-industry practice. By BPC’s estimates, the MCA industry will have more than doubled its small business funding to $19.2 billion by year- end 2019, up from $8.6 billion in 2014.

Bankrolled by a broad assortment of hedge funds, private equity firms, family offices, and assorted multimillionaire and billionaire investors on the qui vive for outsized returns on their liquid assets, the MCA industry promises a 20%-80% profit rate, reports David Roitblat, president of Better Accounting Solutions, a New York accountancy specializing in the MCA industry. Based on doing the books for some 30 MCA firms, Roitblat reports that the range in profit margins depends on the terms of contracts and a funder’s underwriting skills.

The numerical size and growth of the MCA industry is hard to ascertain, reports Sean Murray, editor of deBanked (this publication), which tracks trends in the industry and sponsors several major conferences. “So much is anecdotal,” Murray says.

Even so, the evidence that MCA companies are proliferating—and prospering—is undeniable. Over the past two years, deBanked’s events, which experience substantial attendance from the MCA industry, have consistently sold out, requiring the events to be moved to larger venues. In Miami, attendance in January this year topped 400-plus attendees, Murray reports, roughly double the crowd that packed the Gale Hotel in 2018.

Similarly, the May, 2019, Broker Fair in New York at the Roosevelt Hotel drew more than 700 participants compared with the sellout crowd of roughly 400 last year in Brooklyn. (Despite ample notice that this year’s Broker Fair at the Roosevelt was sold out and advance tickets were required, as many as 40-50 latecomers sought entry and, unfortunately, had to be turned away.)


The upsurge of capital and the swelling number of entrants into the MCA business has all the earmarks of a gold rush. “Everybody and his brother is trying to get a piece of the action,” asserts Roitblat, the New York accountant.

gold rushAnd there are two ways to hit paydirt in a gold rush. One way is to prospect for gold. But another way is to sell picks and shovels, tents, food, and supplies to the prospectors. “If you can find a way to service the gold rush, you can make a lot of money,” says Kathryn Rudie Harrigan, a management professor and business-strategy expert at the Columbia University Graduate School of Business. “It’s like profiteering in wartime.”

As Professor Harrigan suggests, cashing in on the gold rush by servicing it has parallels across multiple industries. Consider the case of Charles River Laboratories, which has capitalized on the rapid development of the biotechnology industry over the past few decades.

As scientists searched for biologics to battle diseases like cancer and AIDS, the Boston-area company began producing experimental animals known as “transgenic mice.” Informally known as “smart mice,” Charles River’s test animals are specially designed to carry human genes, aiding investigators in their understanding of gene function and genetic responses to diseases and therapeutic interventions. (The smart mouse’s antibodies can also be harvested. “Seven out of the eleven monoclonal antibody drugs approved by the Food and Drug Administration between 2006 and 2011,” according to, “were derived from transgenic mice.”)

In the MCA version of the gold rush, a bevy of law and accounting firms, debt-collection agencies and credit-approval firms, among other service providers, have either sprung to life to undergird the new breed of alternative funder or added expertise to suit the industry’s wants and needs. (This cohort has been joined, moreover, by a superstructure of Washington, D.C.-based trade associations and lobbyists that have been growing like expansion teams in a professional sports league. But their story will have to wait for another day.)

Rather than being exploitative, supporting companies serve as a vital mainstay in an industry’s ecosystem, notes Alfred Watkins, a former World Bank economist and Washington, D.C.-based consultant: “A gold miner can’t mine,” he says, “unless he has a tent and a pickaxe.”

And in the high-risk, high-reward MCA industry, which can have significant default rates depending on the risk model, many funders can’t fund if they don’t have reliable debt collection. Many of the bigger companies, says Paul Boxer, who works on the funding side of the industry, have the capability of collecting on their own. But for many others—particularly the smaller players in the industry—it’s necessary to hire an outside firm.


One of the more widely known collectors for the MCA industry is Kearns, Brinen & Monaghan where Mark LeFevre is president and chief executive. The Dover (Del.)- based firm, LeFevre says, first added MCA funders to its client roster in 2012; but it has only been since 2014 that “business really took off.”

LeFevre won’t say just how many MCA firms have contracted with him, but he estimates that his firm has scaled up its staff 35%-40% over the past five years to meet the additional MCA workload. The industry, LeFevre adds, “is one of the top-growth industries I’ve seen in the 36 years that I’ve been in business.”

He also says, “People in the MCA industry know a lot about where to put money, but collections are not one of their strong points. They need to get a professional. It gives them the free time to make more money while we go in behind them and collect.”

If repeated dunning fails to elicit a satisfactory response, KBM has several collection strategies that strengthen its hand. The big three, LeFevre says, are “negotiation, identifying assets, and litigation.” He adds: “We have a huge database of attorneys who do nothing but file suit on commercial debt internationally. Then we can enforce a judgment. You don’t want someone who just makes a few phone calls.”

Because business has become so competitive, LeFevre says, he won’t discuss his fee schedule. As to KBM’s success rate, he says no tidy figure is available either, but asserts: “Our checks sent to our clients are more than most agencies because of our proprietary collection process.”

Jordan Fein, chief executive at Greenbox Capital in Miami and a KBM client told deBanked: “We work with them. They’re organized and communicate well and they know to collect. They’re on the expensive side, though. I’ve got other agencies that I use that are cheaper.”

Debt-collection firm Merel Corp, a spinoff from the Tamir Law Group in New York, might be a lower-cost alternative. Formed in just the past 18 months to service the growing MCA industry, Merel typically takes 15%-25% of whatever “obligation” it can collect, says Levi Ainsworth, co-chief operating officer.

A successful collection, Ainsworth asserts, really begins with the underwriting process and attention to detail by the funders. “Instead of coming in at the end,” he says, “we try to prevent problems at the start of the process.”

For an MCA firm dealing with an excessive number of defaults, Merel sometimes places one of its employees with the funder to handle “pre-defaults,” for which it charges a lower fee. The collections firm has also built a reputation for not relying on a “confession of judgment.” Now that COJs have been outlawed for out-of-state collections in New York State, Merel’s skills could be more in demand.

Better Accounting Solutions, which has its offices on Wall Street, is another service-provider promising to lighten the workload of MCA firms by providing back-office support. The company is headed by Roitblat, a 36-year- old former rabbinical student turned tax-and-accounting entrepreneur. Since he founded the company with two part-time employees in 2011, it’s ballooned to some 70 employees.


Roitblat does not have all of his firm’s eggs in one MCA basket. His firm handles tax, accounting and bookkeeping work for law firms, the fashion industry, restaurants and architectural firms. Even so, he says, thirty MCA clients— or more than half his clientele—rely on the firm’s expertise, three of whom were just added in June. His best month was January, 2018, when six funders contracted for his services. “Growth in the MCA industry has been explosive,” he says.

MCA accounting work has its own vagaries and oddities. For example, because of the industry’s high default rate, Roitblat notes, a 10%-slice of every merchant’s payment is funneled into a “default reserve account.” And when an actual default occurs, credits are moved from the receivables account to the default reserve account.

Roitblat takes pride that his firm’s MCA work has passed audits from respected accounting firms like Friedman, Cohen, Taubman and Marcum LLP. Moreover, he has helped clients uncover internal fraud and, in one instance, spotted costly flaws in a business model. An early MCA client, Roitblat says, had no idea that “he was losing close to $100,000 a month by spending on Google ads.”

Better Accounting also keeps its rates low. The firm typically assigns a junior accountant to handle clients’ accounts while a senior manager oversees his or her work. “He (Roitblat) does a fantastic job,” says David Lax, managing partner of Orange Advance, a Lakewood (N.J.)-based MCA firm. “They understand the MCA business. And even if your business is small, they can set up the infrastructure and do the work more economically and efficiently than you can. You’d have to create the position of comptroller or senior-level accountant,” Lax adds, “to equal their work.”

Top-notch competence and low rates, Lax says, are not the only reasons he often refers Roitblat’s firm to fellow MCA companies. “The only thing better than their work,” he says, “is the people themselves.”

Whether it’s oil and gas, banking and real estate, construction, health care or high-technology—you name it—lawyers have an important role across nearly every industry. So too with the MCA industry where, as has been shown, there is an especially high demand for attorneys skilled at winning debt-collection cases.

To hear Greenbox’s Fein tell it, a skilled lawyer handling debt collection can write his or her own ticket. A talented attorney, he says, not only retrieves lost money and prevents losses, but enables the funder to “offer the product cheaper than the competition.

“We use a ton of attorneys in 35 states in the U.S. and in Canada,” Fein adds, “and you have no idea how many attorneys we go through until we find a good one.”

Until recently, much of the MCA industry’s success has resulted from a hands-off, laissez faire legal and regulatory environment—particularly the legal interpretation that a merchant cash advance is not a loan. The industry has also benefited from the fact that most credit regulation focused on consumer credit and not on business and commercial financings.

But now, as the MCA industry is maturing and showing up on the radar screens of state legislatures, Congress, regulatory agencies, and the courts, there is heightening demand for legal counsel. In just the past 12 months, California passed a truth-in-lending statute requiring MCA firms not only to clearly state their terms, but to translate the short-term funding costs of MCAs into an annual percentage rate. The state of New York, as has been noted, passed legislation restricting the use of COJs.

Moreover, notes Mark Dabertin, special counsel at Pepper Hamilton, a top national law firm based in Philadelphia, the state of New Jersey is contemplating licensing MCA practitioners. The Minnesota Court of Appeals recently determined in Anderson v. Koch that, because of a “call provision” in a funding contract, a merchant cash advance was actually a loan.


And, Dabertin warns, the Federal Trade Commission, which has the authority to treat a merchant cash advance as a consumer transaction—replete with the full panoply of consumer disclosures and protections—is training its gunsights on the industry. “On May 23,” Dabertin reports in a memo to clients, “the FTC launched an investigation into potentially unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.”

These pressures from government and the courts will only make doing business more costly and drive up the industry’s barriers to entry. Failing to stay legal, moreover, could not only result in punitive court judgments, but render an MCA firm vulnerable to legal action by their investors.

“It’s inevitable that the industry will evolve,” Dabertin says, and firms in the industry will have to self-police. “They will need to hire counsel and a compliance staff,” he adds. “You can’t just do it by the seat of your pants.”

Last modified: August 19, 2019

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