Merchant Cash Advance Default Rates

Here’s a question that every investor, lender, and underwriter asks at some point, “What is the default rate on a Merchant Cash Advance?” I personally don’t like when Merchant Cash Advance is overgeneralized since every funder offers their own variation of it, has a different tolerance for risk, and calculates under-performing or non-performing accounts in a unique way. Alas, I am not trying to avoid the question but want to make it clear that there is no one-size-fits-all financing model, nor a standard for defaults. I will quote publicly available information though…

On Deck Capital
10/9/12 – States their default rate was in the low single digits, but it was double that amount during the recession. Source: Upstart Business Journal

3/27/13 – States their default rate is around 5%. Source: Forbes

Capital Access Network
10/1/12 – Default rate stated to be in low single digits by their CEO, who adds that $275 million in accounts have underperformed but not all of those have been written off. Source: Digital Transactions

2/14/13 – Claims their loss rate (at least for a selection of their portfolio) was 3.2%. Source: Gigaom

Kabbage
11/13/12 – CEO claimed their default rates were below 2%. Source: USA Today

IOU Central
9/30/12 – Public financial statements reveal that more than 8% of their loan portfolio is impaired or past due. Source: IOU Financial Inc.

Outside opinion
10/1/12 – A senior manager at First Annapolis Consulting claimed that Merchant Cash Advance default rates averaged 12 to 13% in 2009, but that they are down to around 4 or 5% today. Source: Digital Transactions

SBA Community Express loans
12/15/2008 – An SBA program that guaranteed small business loans between $5,000 and $250,000 (this range sound familiar?). Default rate was 7% and the program was shut down on April 30, 2011. Source: LA Times

Borro
6/13/2013 – Borro CEO reports their bad debt in this video to be approximately 8-10%. They offer personal asset loans and their clients are primarily small business owners.

Despite these figures, I still hear from account reps to this day who claim that up to 20% of their portfolios default. These defaults don’t necessarily all happen on the first advance or loan, as they may happen after additional rounds of capital. Perhaps more interesting is that these reps claim the funders don’t so much as bat an eye at these statistics.

So what’s the default rate of a Merchant Cash Advance? Well it depends on a lot of things…

MCA Industry Continues Expansion

It’s said that one way to measure success or growth of an industry is to count how much capital is being raised. In that case, Kabbage and On Deck Capital have been on fire lately.

Early this morning, Kabbage announced they had secured a new $75 million line, after having just raised $30 million 6 months ago. The Forbes article announcement states that Kabbage has funded 60,000 deals to date and predicts to fund 100,000 deals in 2013 alone, a figure hard to comprehend considering that’s equivalent to the amount of transactions Capital Access Network has managed to do over the course of 15 years. I understand that Kabbage may do smaller, shorter term deals, but Capital Access Network has dominated MCA for a long time. Could Kabbage really do 100,000 deals this year? I’m unsure about this one.

Are traditional MCA funders missing out by letting Kabbage rule Ebay, Amazon, and Etsy unchecked? Is the Internet really that different than the brick and mortar market? Late last year, Amazon entered the financing market but for the purpose of strengthening their selling partners, so there are several reasons funders are tapping that market.

Paypal has been sitting on the sidelines and is perhaps considering jumping in the ring themselves. They are beta testing now with Ebay sellers.

Merchant Cash Advance is exploding in all directions. Did you hear that Yellowstone Capital funded $700,000 to a restaurant with the help of Strategic Funding Source? That’s a lot of money for a restaurant!