Merchant Cash Advance Industry is Busy at Work
May 16, 2013
After what was one of the wildest two weeks in Merchant (MCA) history, the game-changing news finally subsided, but no one is taking a deep breath. Instead, everyone is busy working their butts off trying to help small businesses grow.
UPDATE 5/16: RapidAdvance has acquired the operating assets of ProMAC. First Instance of consolidation that we’ve been predicting would happen this year. See news release detailing the acquisition HERE.
There is just loads of capital available right now and the technology is catching up quick to support the mass deployment of it. A writer for the American Banker believes that the MCA industry is even beginning to threaten community banks.
Many community bankers would be open to using online applications and other technological tools to make faster loan decisions, says Trey Maust, co-president and chief executive at the $121 million-asset Lewis & Clark Bank in Oregon City, Ore. But most community banks use a business model that requires more hands-on interaction with borrowers, he says.
Hands-on is another term for driving back and forth to the bank for appointments, having the bankers visit your business, all the while they try to sign you up for other bank products, like checking accounts that incur a monthly fee.
Who’s at Work
We know some of the major industry players but it’s interesting to see who else is doing significantly large volume. Pearl Capital recently reported funding $7 million in a single month and United Capital source came in at a tad shy of $4 million in just this past April. These are firms you may have heard of already, but they’re now sitting at the big kids table.
What the Generals are Saying
If you haven’t been paying attention to the DailyFunder.com forum, 4 Chief Executives have contributed to the site in a very meaningful way by sharing their thoughts on the MCA industry at large. This is the kind of wisdom you would normally get in bits and pieces through occasional citation in the Green Sheet or other publications, but the full monty has materialized in the very exclusive CEO Corner. Some key highlights from what they’ve shared so far:
Excerpts from Jeremy Brown, CEO of RapidAdvance:
Those of us that have been in this business for 5 years or more – Rapid started in 2005 – are excited at the positive press we get today vs. several years ago and how we are becoming embraced and accepted as a mainstream product. More PE firms, banks, and others want to invest in or lend to the industry. Those groups have always been intrigued by the returns in this industry but the conversations are different today.One thing I think will be different next year are fewer deals offered over 12 months in payback period. When you look at the data over an extended period of time, 18 month term loans don’t make sense for the merchants that are funded. It’s not the most efficient use of funds, limits the ability for the merchant to renew and the longer term deals are far riskier. (See: Year in Review and What Next Year May Bring)
Isn’t that the point of a 6 month MCA – to meet a current need and have the merchant be able to draw again in 4-6 months for the next capital need? That is the problem with the 15 – 24 month deals that are being offered to merchants today. Our industry is based on providing working capital to merchants. By its very definition, working capital is less than 12 months. Longer term deals are permanent capital, even when they are repaid over 15-24 months.it was no surprise when the economy tanked in late 2008 that the merchants in our portfolios at that time took a major hit to sales and therefore the funding companies losses increased by 50% or more on their outstanding portfolios. So what happens when the next recession – big or small – hits and funders have portfolios out to 24 months? It doesn’t take an MBA from Harvard to figure out that answer. (See: Working Capital or Permanent Capital
Haven’t gotten into the industry myself in 2006, I can totally validate the complete 180 in press coverage. I’ve put all my energy into MCA and it’s gratifying to finally hear the praises so many years later.
Excerpts from Steve Sheinbaum, CEO of Merchant Cash and Capital:
The industry already services hundreds of thousands of small business merchants with cash advances for growth and other purposes based upon monthly credit card receipts. For years this has been the basic model of operation. But, what about the substantial number of businesses that require quick and easy access to capital who don’t accept credit cards or don’t produce enough in monthly credit card receipts to qualify under the normal MCA guidelines? Tens of thousands of businesses could use the capital infusions the industry provides daily but either don’t think they’ll qualify or, because of our lack of creativity, the industry hasn’t produced a means of addressing their needs. These businesses would make great customers but because of the rigid requirements we have in place to protect our livelihoods we’ve left money on the proverbial table.That’s not the case anymore. (See: Creativity in the C-Suite…Another way to Fund!)
In regards to advances on gross revenue instead of just credit card payments, he’s absolutely right.
Excerpts from Andy Reiser, CEO of Strategic Funding Source:
the most important part of any deal is the people. We rely heavily on the relationships we have with the client and most importantly with our ISO partners and ISO syndicate partners who invest side by side with us. Valuing these relationships is far more important than relying solely on the numbers and how sophisticated our technology is.Over our 8 year history, we have noticed that the performance of a deal has more to do with the relationship we have with our ISO partner and ISO syndicate partner, then with the deal itself. We have all kinds of tools available to help us analyze the potential success of a deal – FICO scores, due diligence checklists, signed affidavits, warranties and representations, scoring models, algorithms, etc. And yet, some of the ugliest deals on paper have been some of our best performers, while some of the most attractive deals on paper have been nothing but trouble. (See: Business and Baseball Fantasies)
During my time as a head underwriter, I witnessed the exact same thing. Solid referral partners had solid performing clients even if they didn’t look so good on paper. Likewise, the shakier resellers had clients that underperformed across the board, including the deals that looked cleanest.
Excerpts from Craig Hecker, CEO of Rapid Capital Funding
As each MCA company grows and creates a positive reputation, we all grow as an industry…together. But as our popularity grows, however, so does our competition. We already know that Amazon, eBay, and Google are stepping into the market, and AMEX is looking to expand their short term financing portfolio. These big business industry leaders will help build our brand of finance and benefit our portfolios, but I also think it is fundamental that we market ourselves as the alternative to big business finance and identify ourselves with the small business owner. (See: Small Business and How MCA Can Bridge the Gap to Success
We’ve got some big names in the industry now, whether they are financing the merchants directly or backing the funders that do the financing. I agree that you need not be intimidated by competing against these established brand names. Positioning yourself as the funder next door, people that have walked a mile in the merchant’s shoes (literally) can actually be a strong advantage.
What’s Next?
We’re pretty confident there will be more big headlines in the near future but for now we can’t confirm or say anything. DailyFunder.com is also lining up additional industry captains to participate in the CEO Corner and I’m sure there will be plenty of nuggets for us all to dissect. They’re probably the best source of MCA information that you can possibly get.
Stay tuned.
– Merchant Processing Resource
https://debanked.com
MPR.mobi on iPhone, iPad, and Android
Catch up with Alternative Business Lending
May 7, 2013
If you feel like you’re falling behind on the news, you’re not alone. Things are happening FAST. here’s what you need to know:
5/7/13: Google Looks to Profit from Alternative Lending. Say hello to Mother Google.
5/6/13: Forbes interview with a Kabbage co-founder. It did not sound like they plan on remaining exclusive to the e-commerce side of business lending.
5/3/13: Summary of the ETA Expo. ACH is now the leading platform behind Merchant Cash Advance.
5/2/13: Google Acquires a Stake in Lending Club. This of course begged the question that was asked in BusinessWeek the next day on 5/3/13 in Does Google Want to be a Small Business Lender?
5/2/13: IOU Central smashes last year’s numbers. Publicly traded in Canada, this funder is only picking up steam.
5/1/13: Google Ventures and Peter Thiel invest in On Deck Capital. How’s that for big names?
5/1/13: My Silicon Valley VC prediction comes true with the On Deck and Lending Club announcements.
4/24/13: Business Financial Services Upgrades to $82 million credit facility. Not too shabby
4/24/13: IOU Central renews their credit facility.
4/24/13: Rumors begin to swirl that Amerimerchant has also landed a new credit facility. We have no confirmation on this.
How’s that for a 2 week span and those are just some of the headlines. More news is on the way as we are hearing rumors galore.
Be sure to join the industry chatter about these developments on DailyFunder in these 2 hot threads:
Google investing in the industry
OnDeck vs. Kabbage
I made another prediction back in February 2012 (Does Your Mom Sell Merchant Cash Advance?) in which I said consolidation was inevitable. With all these funders raising massive capital, mergers and acquisitions will be next on the agenda.
ETA Expo Recap
May 3, 2013
Recap of the ETA Expo as it pertains to Merchant Cash Advance:
- Just about every funder has an ACH program or is working on implementing one.
- Many funders are licensed lenders or are working to become licensed in the states where it may be necessary. There actually seemed to be a lot of excitement about this. Funders are finding comfort in being subject to state mandated regulations as it probably raises their legitimacy and it will make their businesses easier to value when trying to raise money or sell.
- The ACH repayment market will be larger than the split-funding market this year. There’s no doubt in my mind about this. That means that ACH funding is now the primary protocol behind Merchant Cash Advance.
- Almost everyone is working hard to build up their technology. I got a personal demo of RetailCapital’s ISO/Agent system in addition to Capital Access Network’s new CapTap. Both are great. Capital Stack also has a beautiful platform.
- Stacking is the issue of 2013 as I heard that word uttered probably every 30 seconds for a whole week. I know the NAMAA folks are talking about it but I don’t know what the consensus is. It’s important to keep in mind that many funders aren’t NAMAA members and that affects NAMAA’s ability to dictate policy. Capital Access Network, the largest funder in the industry isn’t even a member.
- Speaking of NAMAA, they refaced their website and it looks A LOT better. I see only 14 members listed but it’s my understanding that there are closer to 20 of them.
- Factor rates are all over the place. Swift Capital has a new 1.099 program, which has got to be the first one to fall under the 10% threshold aside from Amex’s Merchant Financing. Higher risk deals however still operate in the 1.49 and up range. There is no one-size-fits-all product anymore.
- There were several direct lenders walking around that I had never heard of and they are apparently doing significant monthly volume. More and more people are getting into the funding business.
- It’s exhausting trying to keep up with the news surrounding On Deck Capital. They are on a very deliberate path and what we keeping seeing and hearing is them just checking things off on their to-do list. I bullet-pointed my theory on DailyFunder in response to a few posts.
- Discover and Priority Payments threw great parties.
- New Orleans has a lot of charm.
Make sure to check out my updates and photos that I’ve finally posted from the ETA Expo on DailyFunder and feel free to add your own if you were there.
Dozens of photos from the show
Also read: Soul Mates: Merchant Cash Advance and Silicon Valley VCs
Soul Mates: Merchant Cash Advance and Silicon Valley VCs
May 1, 2013
Almost 1 year ago to the day, I wrote a piece titled How the Facebook IPO Affects the Merchant Cash Advance Industry. In a most fitting way to commemorate this anniversary, it was reported early this morning that Google Ventures and Peter Thiel are investing in On Deck Capital (“ODC”) through additional Series D Financing. Thiel is especially symbolic in this case as he was the first outside investor in Facebook back in 2004.
But don’t expect Jesse Eisenberg to be called upon to play Noah Breslow or Mitch Jacobs in a movie about small business lending just yet, as the ODC story is a tad less revolutionary than facebook. Or maybe it’s not. Google Ventures is not one of the usual backing suspects in the MCA industry, but their involvement in this case is a perfect validation of my prediction 1 year ago.
Merchant Cash Advance financing turns 15 this year and split-funding goes back more than two decades, but the best of times are just beginning. On September 19, 2012 I bid farewell to an era and made my case for the one I foresaw on the horizon. Facebook wasn’t the first social network on the Internet, nor was their concept original, but they changed how we interact with strangers, friends, and family members online forever. There is a familiar trend with ODC and even Kabbage, two names that every journalist appears obligated to mention these days when writing about Main Street. Perhaps their technology based approaches send a tingle up the leg of the mainstream media or maybe they’re just really changing the game. They definitely appeal to the Silicon Valley crowd in a way that the old guard of Merchant Cash Advance companies apparently do not.
“Old guard, did you just say old guard?!”
Contrary to urban myth, On Deck Capital and Kabbage are not taking on small businesses all by themselves. They are but a fraction of the overall alternative business lending market with the leaders being anything but old guard. Debt and Equity are pouring into these firms and there are no signs of it letting up any time soon. I can’t go a day without a fund, lender, or investor reaching out to me in some way with the hope that I can steer them to a funding provider in need of a capital raise. Their options to get in now are running low and my advice to them is to set your sights lower on ISOs. The big funders have got capital covered and the ISO market is the next gold rush.
The industry can’t grow without originations and most funders depend on some level of ISO business (a few entirely) to hit their benchmarks month after month. So the funders do their job well, but the lead generators are driving a large percentage of the growth.
In March, I attended the Search Marketing Expo in Silicon Valley. In a sheer twist of fate, at the same time a Merchant Cash Advance guy like myself was touring the campuses of Facebook and Google, it appears that Facebook and Google were busy touring the campuses of a Merchant Cash Advance company.
The connection between Silicon Valley and alternative business lending is beginning to run deep, very deep. I think we’re soulmates. Only time will tell.
Follow us at the ETA Expo
April 30, 2013May 3, 1:00am: I underestimated how easy it would be to make frequent updates. Wednesday was fantastic. I uploaded a couple dozen photos and updates all at once earlier today over on DailyFunder. As soon as the show was over, I found myself on Bourbon Street at the Discover party followed by the Priority Payments party. Both were a great time.
My Recap of the show is up now: ETA Expo Recap
Soul Mates: Merchant Cash Advance and Silicon Valley VCs
Original story about On Deck Capital’s investment from Google Ventures and Peter Thiel
My theory on why On Deck Capital took a paltry $17 million from Google Ventures and Peter Thiel
Photos and updates from the ETA
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May 1, 1:00am: Great start to the show this evening. Merchant Cash Advance providers and alternative business lenders continue to have a very strong presence in the payments industry. The booths I saw include: RetailCapital, NextWave Funding, Merchant Cash Group, On Deck Capital, Capital Access Network, Strategic Funding Source, American Finance Solutions, Swift Capital, MotherFund, and Principis Capital. GRP Funding and Paramount Merchant Funding are also on the exhibitor list but I didn’t spot their booths yet. That’s pretty substantial and it omits the major presence of Merchant Cash Advance companies that aren’t exhibiting. I bumped into Merchant Cash and Capital and walked the floor a bit with David Rubin of Capital Stack.
I met the guys behind Super G Funding which lends money against residuals. They’re great guys and they have such a unique role in the industry.
I think every funder I spoke with was quick to mention that they do 12 month deals and either offer direct debit repayment or will have it soon. The ACH train has disrupted the split-funding market pretty severely though many funders continue to do big numbers via split.
Nobody seemed to have an appetite for low FICO score deals (500s and below) except for Merchant Cash Group and Capital Stack which target the higher risk market intentionally. And when I say “don’t have an appetite for,” I literally mean when asking a funder if they do below 500 credit, the answer is some version of “HECK NO!!”
Overall tone, and perhaps its because opening night included open bar, but it was very optimistic. Most funders seemed intent on expanding and are eager to service as much business as possible. I definitely get that sense that there is a real focus these days on the bigger fish ISOs ($1 million+ in referral business a month). When newbie brokers enter the space, funders spend an enormous amount of resources developing them and many times they just don’t pan out. Either the brokers don’t have the capacity to do more than a handful of deals, or they just don’t “get it.”
If you’re a mom and pop ISO and you have just 1 or 2 deals a month, it’s more difficult these days to get time and attention from a funder. Capital is flooding into the industry and everybody wants partners that can produce volume. From a resource standpoint, the “1 and done” reps are not an efficient use of time.
Big ISOs have a lot of negotiating power at their disposal these days. In the last 7 years, it was good to be an ISO, then hard to be an ISO and now it’s good again. Many things in MCA have a weird way of going full circle. Hope to see you on Wednesday.
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Apr 30, 1:00am: 
Merchant Processing Resource will be publishing updates as often as we can from the ETA Expo in New Orleans. I am very excited to be down here. Earlier today I had the opportunity to eat beignets at Cafe Du Monde, visit the French Market District, and take a ride on the Natchez Steamboat on the Mississippi River. But starting Tuesday, it’s all business. A schedule of events can be found on the ETA’s website.
You can follow along with everyone else in town on twitter using #ETAExpo2013 or #ETAExpo13
and of course via the DailyFunder Merchant Cash Advance iPhone App.
Some pre-conference tweets:
ETA Expo 2013 on Twitter
pre-conference tweets
Storified by Sean M· Mon, Apr 29 2013 22:21:50
Here’s to learning, networking, and having fun!
– Merchant Processing Resource
https://debanked.com
It Got Said – Merchant Cash Advance – Friday Fun
April 26, 2013In honor of Friday, we’re having some fun…
Caught on twitter
And Also
Business Financial Services landed an $82 million credit line
A third industry captain will be joining DailyFunder’s CEO Corner early next week at the ETA Expo. Stay tuned! Read articles put out by two other MCA CEOs.
Sean of Merchant Processing Resource and the DailyFunder co-founders will be on the trade show floor of the ETA Expo next week. Considerable time will be spent at Merchant Cash Group‘s exhibit at booth #751 and a guest appearance at Strategic Funding Source‘s booth at #916. We’d love to see you there. Make sure you download the DailyFunder iPhone app as we will try to maintain a live blog of the events.
Funding Restaurants is Risky Business
April 22, 2013
Perhaps as a fitting follow up to our recent post on Merchant Cash Advance Default Rates, an article in the Dispatch reveals that of all the businesses getting SBA loans, restaurant franchises are the worst performers. WHAT?! You read that right, but many of us have been saying this all along. Retail and restaurants are inherently high risk and that’s partially why they’ve been the bread and butter of the Merchant Cash Advance industry for so long. A friend of mine works in the commercial lending department of a major bank and he’s told me bluntly many times that their POLICY when it comes to restaurant loan applications is to decline 100% of the time. They don’t care if they have 800 credit, 40 years in business and 50 locations, the default rate is just too damn high and not worth the risk. Now the bank doesn’t come out and market this publicly and that’s why I haven’t identified my friend or the name of the bank, but when you see the numbers, it makes sense.
The SBA states that 20% of their guaranteed loans default
- Of the loans that defaulted, more than 50% of them defaulted before they were 20% paid in
- Of the loans that defaulted, more than 33% of them defaulted before they were 10% paid in
- Of the loans that defaulted, more than 7% of them defaulted before making a single payment towards the principle
The Dispatch points out that the SBA guarantees higher risk loans, as if that somehow justifies these statistics. The maximum allowable interest rate on a 7(a) loan with a maturity under 7 years is prime + 2.25%. Right now prime is 3.25%. Think about this… the interest rate is 5.5% and the default rate is 20%. Most businesses default without hardly paying anything. The taxpayers eat the billion dollar losses that result and Main Street America goes on believing that an interest rate below 6% is reasonable.
In the private sector, there is no government body sweeping billions of dollars in losses under the rug. Alternative lenders like Merchant Cash Advance providers are on their own to price deals efficiently and rationally. As you might guess, that price is usually MUCH higher than 5.5%. Many funders charging in excess of 40% barely break even at the end of the year, and some go out of business. Think about it… many businesses they support don’t even qualify for an SBA loan and the default rate on those is 20%. To operate in such a risky market, many try to hedge those risks by setting daily payments as opposed to monthly, and setting the loan term to 1 year or less. Even then, economic swings and competition have a way of making sustainability difficult.
On another note, here we have the SBA stating that 20% of their loans default, many before making even a dent in the principle and we have some alternative business lenders targeting an even riskier market that is claiming default rates of 2-5%. Something doesn’t add up here. Just saying…
