Merchant Cash Advance Providers Cope with New Business Failure Rate

“Why can’t I get a better deal? I’ve been in business for 9 months already!”

Is this you?: Your doors open, you bring in customers, and revenue is pouring in. It seems like your business plan was right on the mark and there’s no doubt things will continue as is or get better. For cash flow or expansion purposes, you seek out a loan or line of credit.

Your bank shuts you down and not because they weren’t impressed with your business, but because they require a minimum of 3 years in business. So what to do now?…

While banks can only sustain a certain amount of risk, a Merchant Cash Advance(MCA) provider can fill the gap by purchasing the future credit/debit card processing transactions of a business. It’s a solid capital source for an old company and a perfect fit for a new one. But even they have a risk threshold.

YIKES! 25% 1st year failure rate, 50% 1st year failure rate, only 1 in 3 survive, 9 out of 10 are gone in first two years! Despite the wide inconsistencies, it’s enough to rattle the underwriters of MCA providers across the country. As a result, the majority of Merchant Cash Advance(MCA) providers require a full year of operation before being eligible to apply. Some buck the trend and there’s a reason for it.

Statistics claiming a failure rate of 50-90% for small businesses seem to be largely overexaggerated. Unfortunately, these figures have caught on as fact and are quoted, requoted, reported, distorted, and multiplied. It’s discouraging and yet millions of people start a business every year. Here are some verifiable and credible stats:

U.S. Department of Labor: 24% of all businesses started in 1992 had failed by 1996

Amy E. Knaup, Bureau of Labor Statistics: 34% of businesses fail within the first 2 years, 56% fail within first 4 years

Score.org (Official partner of Small Business Administration): Reported in Nevada that 50% of all new businesses fail within 2 years

The data reflects the survival rate of businesses started in the 2nd quarter of 1998. Leisure and hospitality is the category most suited for a MCA and 20% of them failed within the first year.

Business Owners: There is no such thing as a low interest business loan, as we presented in a previous article. Some MCA providers are purchasing about $14,000 worth of credit card receivables for a price of $10,000 today. That’s a cost of $4,000. Think about it this way: If someone gave you $1, could you turn it into $2? If someone gave you $10,000 could you turn it into $20,000? If you believe in your business, then you will create repeat customers.

For example:

A $10,000 investment in advertising immediately brings in $12,000 of sales. At first glance, the $4,000 cost on $10,000 from a MCA does not seem worth it. However, the repeat business comes into play. If only half of them come back a second time, then your return becomes $18,000 ($12,000 in sales the first time, and $6,000 the second time).The return on your investment grows for as long as any one of those customers continues to do business with you in the future. $50,000 in sales over the course of a year can be the result of an initial $10,000 advertising campaign. Is it worth it now? absolutely!

Strangely, some business owners still balk because the cost is higher than their expectations. As Americans we have a tendency to believe that anything above 10% is too high. We could be poised to make 500% of our investment and still don’t want to pay 40% for the funds to make it happen.

It’s a pyschological thing. As business owners, we want a 5% interest rate but don’t consider the fact that interest rates that low only exist with taxpayer guarantees. We want a loan from the bank but don’t consider that our collateral (house, car, furniture, future paychecks, spouses belongings) will be reposessed in the case of default. And we want the bank to approve us even though all data indicates that out of the 100 businesses exactly like ours, 20 of them will fail in the first year.

Let us remind you that most MCAs are uncollateralized, are only repaid at the pace that revenue is generated, are not taxpayer subsidized, and available despite the high failure rate for new businesses. In the spirit of a fair deal, it doesn’t get more fair than this. Entrepreneurs are fortunate to have access to capital but if you can’t envision turning $1 into $2, maybe starting a business wasn’t such a good idea…

– The Merchant Cash Advance Resource

https://debanked.com/merchantcashadvanceresource.htm

Who is Really Getting a Merchant Cash Advance?

You’ve seen ads like it before: “Get up to $250,000 for your small business today!”

For the local corner deli, that kind of cash may seem too good to pass up. There’s just one catch, many Merchant Cash Advance(MCA) providers cap funding approvals at somewhere in the range of 125% of a business’s monthly credit card processing volume. That means a deli processing $10,000 would be eligible for up to $12,500. ‘Mom and pop’ shops are often left wondering if anyone could ever really get $250,000 or if that figure is just a deceptive marketing gimmick.

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The Merchant Cash Advance Resource would like business owners to know that $250,000 is not only possible, but deals of this size and larger are made often. The typical recipients are retail chains and restaurant franchises, but any business generating enough volume in credit/debit card sales is eligible. If there was any doubt about the popularity or legitimacy of the MCA financial product, take a look at some franchise names that have used it:

• Burger King
• Domino’s Pizza
• Hooters
• Subway
• Dunkin Donuts
• Taco Bell
• Denny’s
• Wendy’s
• Meineke Car Care
• Maaco
• Aamco Transmissions
• Curves Fitness

This data was confirmed by researching UCC filings on AdvanceMe, Strategic Funding Source, Merchant Cash and Capital, First Funds, and Business Financial Services.

Every funding provider is not created equal. Some of the oldest players such as AdvanceMe, Merchant Cash and Capital, and Strategic Funding Source are capitalized well enough to do deals up to $1,000,000. Other firms specifically seek out larger businesses such as Bankcard Funding in Long Island, New York. According to a representative there, their average funded deal is $100,000. Others have a comfort range of $5,000 to $75,000 but will bring in outside investors if they need to go beyond that.

Merchant Cash Advance is not just for smaller businesses, nor is it a last resort source of capital. It is an established alternative to bank lending that offers incredibly flexible repayment terms. Despite the benefits, a MCA still has a reputation for being expensive. While we don’t dispute that, we do recognize the need for it. Unlike SBA loans which can carry default guarantees up to 90%, MCA’s are completely backed by private investors. There are no billions of dollars to fall back on, government backed guarantees, or bailouts when things turn ugly.

Over the past few years, some MCA firms simply weren’t able to generate enough profit and closed as a result. In the case of Global Swift Funding(GSF), a MCA provider that dissolved back in 2009, the return on investment simply did not prepare them for the loss they would realize from a very important client.

http://www2.ocregister.com/articles/gantes-money-million-2399154-bankruptcy-restaurants

John Gantes, formerly one of the richest Men in Orange County, California owned 110 restaurants throughout the western part of the U.S. As the economy turned sour, he reportedly started loading up on Merchant Cash Advance funding for each location. In the end GSF cried foul, but they could not sustain operations further.

There is risk on both sides of the equation. A MCA is not for businesses on the fritz, but rather is a tool to acquire inventory, new locations, upgrade equipment, get through a slow season, and grow. While much hype surrounds the minimal paperwork requirements for MCA, businesses seeking in excess of $100,000 should expect a more intensive underwriting process.

“Have detailed financial statements handy and expect some scrutiny of the Balance Sheet,” was advice offered by one underwriter. “We’re going to want to make sure you are using these funds for the right reasons.”

And yet the MCA industry stands by their mantra of making capital accessible to all. With funding amounts reportedly as low as $1,000, and more than 21,000 individual advances made in 2010 alone, there is really no better time for a small business owner to apply.

The funds are there but it’s important to set your own expectations of how much you can access. The corner deli should be able to put $12,500 to good use. Our experience shows that positive sales activity will probably make the funding provider more comfortable to extend a larger amount to you down the road. I think we’d all like to get $250,000 today but in the absence of government backed guarantees, a tumultuous economy, and jittery investors, you’ll need to get your foot in the door first and work your way up.

-The Merchant Cash Advance Resource

http://www.merchantcashadvanceresource.com

Images Copyright (c) of 123RF Stock Photos

Behind on Rent? It May be Too Late to Obtain a Merchant Cash Advance

There are numerous uses for a Merchant Cash Advance(MCA) but catching up on rent payments isn’t one of them. Growing a business can strain cash flow. Stretching out payment terms with vendors, overdraft charges, and pulling funds out of a personal account can tend to be part of normal operations. As long as this is ‘business as usual’, MCA Providers are readily available to provide funds.

Stretching out payments is one thing, but not making them at all is another. An underwriter shared this with us. “A restaurant in Arizona had been putting up consistent sales figures 6 months in a row, but they never had more than $100 in the business account. This would’ve been fine except they hadn’t paid their food supplier in 5 months. Before we could even make a decision on the account, the food supplier cut them off and filed suit against them. They had to close 3 days later.” There is a very clear line that defines what’s sustainable and what isn’t.

That particular MCA provider did not have a policy to conduct references with suppliers and had narrowly avoided what would’ve been an immediate default. When we mentioned that to the underwriter, he stated, “Well we do check to make sure they’re current on rent payments.”

That is one underwriting factor that is industry wide, the requirement to be current on business property rent payments. See… there’s a slight little issue that can impede a MCA provider from receiving their purchased sales, and that is if the business is kicked out by the landlord. Being current on payments isn’t scrutinized to the extreme, but rather put into the context of risk.

Making a payment on the 10th, when it was actually due on the 5th might make your landlord cranky but if you’ve been there long enough, there’s probably not any danger. Being one month late can also be accepted by an underwriter so long as the rent payment amount is not excessive. Tips from the underwriter, “If you pay $7,000 a month in rent and you are willing to take $6,000 in funding, we’re going to know most of that is going towards rent and wonder how you will be able to make the following month’s payment on your own.” On the other hand, some business owners have been at a certain location for so long or are so big, that being 30 days behind is business as usual. “If the business has been there 20 years and they make payments a month or two late every time, there really isn’t any indication of a negative situation. Also we’ve seen huge clubs that generate $400,000 a month but are sloppy with their books. These are the kind of businesses that will go 1-2 months without paying and then write out a check for the balance when they get around to it. It can freak out the landlord but as long as they bring in the cash, they’re not going anywhere.”

A general consensus in the industry is that being past due by 2 months and more enhances the risk significantly. Anyone can have a slow season or a bad month but there comes a point when the numbers stop making sense. If 2 months rent is $10,000 and a business sells $13,500 of their future sales today to obtain that $10,000, they’ll be caught up for now. But if the revenue being generated per month doesn’t increase, then they won’t be able to make the following month’s rent payment again. Therein lies the problem because not only is there another rent payment due but a percentage of their sales are going back to the MCA provider, amplifying the strain.

This isn’t to say that MCAs make problems worse, any type of funding would. You could give this same business a $10,000 loan with 0% interest payable in installments over 5 years and they would face the same dilemma. Unless sales improve significantly, there is nothing that can be done for them. Every business experiences a vulnerable phase but if it doesn’t make it over the hump, it’s probably time to call it quits.

Unfortunately, underwriters have encountered the late rent issue plenty of times in the past few years. These are businesses that were affected by the recession and have been on the decline for a long, long time. There are usually other factors that indicate financial stress by this point, such as poor credit. Our underwriting friend shared, “It’s tough to see that some businesses are 2 – 7 months behind on rent and are reaching out for anything at this point. If we approve them, we’re looking at a probable loss. We have applicants assume that since our funds are more expensive than a bank, we’ll pretty much tolerate any level of risk. That’s totally not the case at all. Unlike SBA loans, we have no government guarantees on defaults. We have to answer to private investors at the end of the day.”

MCA providers are only interested in transactions where both parties benefit. Acquisition and overhead costs are so high, that their model only works if they forge long term relationships with clients. There are some simple ways to start this off: Use the funds to buy bulk orders of inventory, advertise, upgrade equipment, make repairs, hire new employees, or open a 2nd location. This is the model that has propelled Merchant Cash Advance to the forefront of the small business world. It’s easy, it’s fast, and it makes sense for both parties. But there is one way to ensure a long term relationship does not happen and that’s if the front door is padlocked. Behind on rent? It’s probably too late…

-The Merchant Cash Advance Resource

http://www.merchantcashadvanceresource.com

Image Copyrighted (c) 123RF Photos