Every few years, particularly during the administration of a divided government, the threat of a default on raising the debt limit of the United States rears up in the political and economic spheres. While both sides tend to play chicken before ultimately settling on a negotiated outcome that they can sell to their bases, the current debt limit crisis feels more serious as the X date of June 1 looms with no settlement in site.
This crisis has a significant effect on various industries, and amongst them is the merchant cash advance business. MCA companies are heavily relied upon by small businesses for immediate financial needs, and understanding what this crisis means for the industry is crucial for getting through it unscathed.
Let’s compare the current landscape to running a business:
When a company opts to increase its debt limit, it essentially seeks to borrow more money, trading liability for an asset. For example, if the company’s equity is worth 100 billion dollars, borrowing doesn’t change this figure as long as the borrowed amount is an idle asset in their account.
The U.S. government should theoretically operate similarly to a regular company, borrowing only what it can pay back, but with the only growing expenses, when the government borrows money and raises the debt ceiling, it doesn’t always have enough funds for repayment.
In addressing its fiscal shortfall, the government operates distinctly from a conventional business. Unlike a company compelled to confront its financial mismanagement head-on, the government possesses the ability to print additional U.S. dollars. However, this course of action inherently devalues the currency.
For the sake of illustration, consider the worth of the dollar as a fixed entity. Suppose every thousand dollars equates to one bar of gold. If we slice this bar of gold into a thousand pieces, each piece represents $1. When the government initiates the printing of more money, it is essentially the government carving that same bar of gold into tinier segments. Meaning, if sliced in 2,000 pieces, the same bar of that once held the value of $1,000 is now $2,000. The total quantity of gold remains constant, regardless of whether it’s divided into 1,000 or 2,000 slices. However, with increased currency in circulation, each dollar—like every slice—holds less value, thereby shrinking everyone’s piece of the proverbial gold bar.
Now that we’ve explained the dangers of wantonly raising the debt limit, how does this affect MCA companies?
The debt limit crisis’s impact on MCAs is pronounced due to the time-value factor of money.
Suppose a mortgage of $100,000, repaid with interest over 30 years, amounts to $300,000. If the value of the dollar reduces significantly over this period – say by 50% – the bank, despite appearing to make a profit, loses money. That’s because the money they receive later has less purchasing power than the same amount ten years prior.
This reality can be acutely felt in periods of high inflation, such as in 2021 and 2022, where inflation neared 9%, and many felt it was closer to 20%. We all feel it during our grocery shops, the prices of experiences, and in other areas of our lives. Here, $100 can only buy what $80 could a couple of years ago, eroding the value of the interest charged.
At Better Accounting Solutions, a number of the MCA businesses we’re working with are concerned with this rapid devaluation of the money they’re funding.
The key factor to consider is the duration for which the capital will be deployed and how it will be recouped. For instance, if you advance $1 million at a 24% factor rate over 24 months and the debt ceiling is raised causing the dollar value to drop, your returns in the second year might be significantly less valuable despite the factor rate. This depreciation means that even though you’re receiving the agreed-upon returns, the funds’ purchasing power is considerably less, translating into a net loss of what would have been 13.5% over the past two years.
However, if you’re giving out (after careful consideration) riskier short-term advances with higher factor rates, daily repayments, and shorter durations, the situation would be different. Here, you’re receiving your return within, say, six months. Even if the dollar’s value decreases by 20% over a year, you’re less affected because your returns are realized in a shorter time and at higher rates, leaving you with a net gain.
Therefore, the debt limit affects MCA providers significantly, whether it’s being covered in the news or not. The devaluation of the dollar, high inflation rates, and other economic consequences of a debt limit crisis can dramatically impact the returns on cash advance businesses, especially those with longer repayment periods. As a player in the finance industry, it’s crucial to consider these elements when making advances or lending money. By factoring in these variables, providers can better protect their interests, minimize risks, and ensure the stability of their operations even during times of economic uncertainty.
Ask yourself this, that customer who missed a payment, do you actually want to continue working with them in the long run? If so, consider just how critical your approach to that missed payment will be. According to a survey, 40% of customers would consider switching to another service provider if a past-due situation resulted in a negative experience. The survey was conducted by Lexop who also found that Gen Z was even more sensitive to these encounters compared to other generations. A whopping 49% percent of Gen Z customers said that they would consider switching after a negative past-due experience, for example.
But good riddance to those that can’t pay! Right? Well, maybe not. Sixty percent of consumers late on bills were late for non-financial reasons, according to the same survey. Thirty percent said they simply forgot to pay and ten percent reported that errors on the bills themselves were to blame. Eight percent said it was simply a matter of their credit card on file expiring!
Oftentimes this situation results in the payment being made. Eighty-five percent of past-due consumers are paying within 30 days of the due date, for example. But were they happy with the process to lead them there? That is the question.
Lexop is a financial technology company that helps organizations automate and scale their collections operations.
Dedicated Commercial Recovery combined modern tech and marketing, as the company released a live action virtual tour of their new offices via drone on Tuesday. The video showcased staff working in an upbeat, positive, one might dare say fun, environment.
The YouTube video is now the company’s most ever watched on their channel.
“We shot that video like eight times,” said Shawn Smith, Chairman and CEO of Dedicated Commercial Recovery. “It was such a cool concept, a way to showcase the new office,” he said.
Smith said the goal of the video was to show that his company’s staff was more than just debt collectors. “We want to show the outside world our culture,” said Smith. “Our team loved it.”
Filmed by Sky Candy Studios, drone marketing is an emerging concept in the world of promoting business.
Smith, who sits on several non-profit boards, wants to use the concept of drone marketing in his ventures outside of his collections company too. “I’m going to talk to the boards and associations I’m a part of, we would love to shoot events [this] way,” said Smith.
The video was also dedicated to the passing of a recent employee of Smith’s. Aubin Davis passed in mid-July and was commemorated at the conclusion of the video. “He was an industry veteran,” said Smith. “We wanted to honor him.”
This week Loans Canada, a lead generation company, released a study documenting the disparities between perceived financial literacy and actual financial well-being. Surveying 1,665 Canadians, the report asserts that those individuals who claim to have a firm grasp of their financial situation may in fact be out of touch.
This being highlighted by major misunderstandings about how to budget for the future as well as a lack of education regarding loan repayments. 72% of the respondents said that they did not save for emergencies, 43% did not track their spending, and 66% do not stick to a monthly budget. Such budgetary omissions outline the potential for a large portion of the Canadian market to be in trouble should unforeseen expenses arise, and the fact that two thirds of the market aren’t even drawing up budgets is a cause for concern.
Such factors are made worse by the community’s seeming misinterpretations of loan terms. With 40% of the survey stating that they didn’t know payday loans were one of the most expensive ways to borrow money, 30% not understanding that paying the minimum amount of a credit card charge still meant you had to pay interest, and just over half of those surveyed were not able to identify the factors which affect the cost of loans, there appears to be a problem surrounding financial literacy and education of individuals regarding loans.
As well as these issues, there is the case of stacking loans, with the study indicating that the practice is not fully understood by Canadians and that the two top reasons for taking on multiple loans are for emergency costs (25%) and making ends meet (43%). Interestingly, the respondents who claimed to have the most confidence in their capacity to make financially sound decisions are more likely to be individuals who stack loans, leading them, inevitably, to have similar or more debt than those surveyed who said they were not confident in their financial decision-making ability.
Altogether, the study paints the picture of Canada as a market in need of further education. While financial literacy isn’t in crisis, the report points towards vulnerable sectors, such as such as those individuals with poor knowledge of loans and interest rates, as well as budgeting, are groups that need to develop a better understanding.
TBF Financial buys $100 million of charged-off loans, leases and merchant cash advances from fintechs, banks, lessorsJanuary 14, 2020
DEERFIELD, IL, Jan. 14, 2020 – Commercial debt sales by fintech lenders, equipment leasing companies and banks are on the rise, with major companies striking deals to sell non-performing loans, leases and merchant cash advances after charge-off, reports Brett Boehm, CEO of TBF Financial.
TBF closed transactions in December totaling $100 million. The three largest deals were with a leading e-commerce company that acquired and liquidated a merchant cash advance business; a captive leasing company that provides financing for transportation equipment and other assets; and one of the 20 largest banks in the nation.
“One reason for the rise in commercial debt selling is the tremendous growth of online alternative lenders,” he explains. “As their business originations have increased, so have the number of accounts that eventually default. By selling commercial debt at charge-off instead of spending years trying to collect it, they can put that money back into making loans and merchant cash advances where they generate a much better return.”
“Other lenders and lessors also recognize that it is more productive to concentrate on their core business rather than chase collections past charge-off,” he adds. “Selling commercial debt provides immediate cash and allows collections personnel to focus on accounts that are more likely to be recovered, earlier in the past-due cycle.”
While the December deals may additionally reflect the eagerness of companies to bring in cash before year’s end, Boehm says prospective deals in the pipeline remain high in January, and he anticipates a busy first quarter 2020.
About TBF Financial
TBF Financial is the leading purchaser of non-performing equipment leases, commercial bank loans, online small business loans and merchant cash advances in the U.S. Founded in 1998, the company buys commercial accounts up to four years old from the date of last payment. This includes equipment leases, loans and lines of credit that have personal guarantees, no personal guarantees, are secured, unsecured, pre-agency, post-agency, pre-litigation, and reduced to judgment. For more information, visit tbfgroup.com or contact Brett Boehm, CEO at email@example.com, 847-267-0660 or via LinkedIn.
Carla Young Harrington
Susan Carol Creative for TBF Financial