Your Default Rate Is Too Low, And It’s Hurting You

November 22, 2022
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David Roitblat is the founder and CEO of Better Accounting Solutions, an accounting firm based in New York City, and a leading authority in specialized accounting for merchant cash advance companies. To connect with David, email

Mind BlownThere may be no word as terrifying to stakeholders in the merchant cash advance business than the term ‘defaults’.

In an industry where a significant portion of revenue is generated from daily or weekly automatic withdrawals from a merchant’s bank account, defaults can cause deep and lasting problems. Not only do they eat into profits, but they damage relationships with banks and processors- both of which are essential to the success of any merchant cash advance company. Defaults can also be contagious: if one merchant in a large portfolio decides to stop making payments, it can have a ripple effect that leads to other merchants doing the same thing.

All these are reasons why MCA companies go to great lengths to avoid defaults at all costs: they exhaustively screen merchants before approving them for funding and do all the due diligence needed to ensure they can follow realistic payment plans. They also attach a fee to every deal to cover the percentage of the deal they expect will not come back, and conventional thinking would be to aim to keep that number as low as possible.

That’s a lot of work to keep that default rate low, but what would you think if I were to contend your default rate is too low, and it’s hurting your bottom line?

Fear of defaults is paralyzing MCA funders and inevitably leading them to leave opportunities-and money- on the table.

Better Accounting Solutions has been the leading accounting firm in the MCA space for over a decade, and has seen this across the board:

Many MCA companies have adopted a risk-averse approach to avoid defaults, opting for sure-fire deals in higher positions, rather than taking calculated risks that could enhance their bottom line. In the name of capitalizing on low-risk deals with a lower chance of default, many companies choose to fund deals where they charge smaller fees than what they could be charging if they choose to fund deals others are wary of taking.

Let’s look at two deal examples for an example of my thesis:

Average Andrew is the perfect merchant for an MCA company. He is getting a $100,000 advance with a deal length of 7 months (140 days) and with his rock-solid history, his default rate is a meager 6%. The RTR on the deal is 44%, the UR fee is 7%, broker’s commission is 10%, meaning the profit on this deal will be $35,500- a net unit profit percentage of 35%, profiting $5000 a month. He is a great client, and a pleasure to work with.

Now let’s examine his buddy, Reformed Ricky. He’s made some mistakes in the past and now wants a business advance to grow the business he believes is The One. No one else wants to touch him, so you offer him a deal of $35,000. Because he is a riskier advance proposition, you can raise the RTR to 49%, and the UR fee to 12%. On a deal like this, the commission is around 14% and the default rate will be a whopping 18% on a merchant like this, but the profit to be made on this deal is $10,150- a 29% net unit profit, getting $3,383.33 monthly profit over the length of the deal.

Now, looking at the structures of both deals, why would I advocate that someone advancing Reformed Ricky instead of Average Andy? What’s the advantage of working with the weaker merchant over the perfect one?

It’s simple:

Because of his history, you can set the duration of Reformed Ricky’s deal to 60 days (3 months). That means according to the terms of his deal, your profit is 9.67% a month. You’ll be stunned to learn that when you break down your monthly profit on Average Andy’s deal, it is a considerably smaller percentage of 5.00%!

merchant cash advance accountingThis means every month you’re making more back on the smaller deal, and are getting it to work for you by placing it into new deals and generating more income for you, because of its shorter term. If you’re only taking deals with longer outstanding balances, it will take you a considerably longer amount of time just to make a smaller profit percentage.

On top of this, we also have to account for the compounding effect you will quickly be seeing when you take these ‘riskier deals: because you’re earning more money per month due to the shortened duration of supposedly weaker deals, you will be able to turn it around more times per year, supercharging your growth quicker than what you’d be seeing you stuck to only ‘traditionally-safe’ deals.

I’m not advocating for funders and brokers to be irresponsible and create a new and much less entertaining version of The Big Short, throwing money around to people that don’t stand a chance of paying it back.

I am saying that they should consider funding merchants and positions they were wary of till now, and responsibly assessing the opportunities and upside for them at those positions.

Of course, this doesn’t mean that you should mindlessly funnel money into every deal that comes your way. You still need to be responsible and vet your investment opportunities carefully, and of course, if it turns out you’re picking the wrong deals and your default rate explodes, you will have to reevaluate your approach.

However, working from a place of fear is not the way to grow and thrive, certainly in this business. Moreover, by avoiding risk altogether, MCA companies are likely to become less competitive over time. After all, it’s only through taking risks and innovating that businesses can thrive in today’s rapidly changing world, especially in the rapidly evolving and growing MCA industry, where more and more people are seeking to find their niche.

A great number of successful investors in MCA companies have complained to me that their partners are too conservative with the deals they are choosing to fund and leaving too much capital in the bank, costing the investors higher facor rates instead of working for them.

This approach is a way to break away, and ahead, of the pack, because only by taking the opportunities others keep passing by will MCA companies be able to grow and compete in the long run.

Don’t Forget About Utah’s Disclosure Law

November 14, 2022
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Utah flag on moneyWhile a new era of business moves forward in Virginia and the clock ticks down to compliance with the new complicated disclosure law in California on December 9th, it can be easy to miss state #3 in all of this, Utah.

Utah’s commercial financing disclosure law goes into effect on January 1, 2023. It’s more than just a form. Covered parties must apply for a commercial financing license. A checklist for that can be found here. Similar to other states, the commission paid to a broker must be disclosed but there is no APR requirement.

The full law can be read here.

Think You’re Good at Closing Deals in the US? Apply Your Skills in the UK or Australia

November 10, 2022
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Think you’re well-versed in the SMB finance business? You might want to take advantage of a fast pass being offered to replicate your success in the UK or Australia.

The opportunity stems from a proposal posted on LinkedIn by Capify CEO David Goldin. Goldin’s got two decades of experience in the business itself and 14 specifically in the UK/Australian markets. Now he’s looking to personally select a handful of brokers and/or small funding companies and guide them on expanding their business overseas.

But why?

Goldin believes that US operators could bring a certain dynamic lacking in the other markets, complete dedication to a single product where there is a lot of opportunity. “There’s very few MCA shops there,” he said. “Very few of them that are MCA-only companies.”

UK Business FundersAnd so the dedicated MCA broker shop is something uniquely American and could prove to be a potent model if applied abroad. Brokers do play a major role in those markets but they’re a jack of all trades, Goldin explained, offering every product there is, resulting in limited throughput for a single core product. Markets like the UK and Australia offer some unique advantages in that they’re English speaking and the products themselves are already established. Goldin said that there’s an opportunity for US operators that “know how to sell risk-based capital” to come in and leverage the Capify infrastructure and intellectual capital.

To be clear, he’s not talking about sitting in an office in New York or Miami and calling business owners in Sydney and London, but about actually opening up a local office in those markets.

“You got to have a local presence,” Goldin said. “A remote company doesn’t work. You need to actually be there.”

Reserve Bank of AustraliaAll this would be set up and developed with the guidance of Capify, a benefit that would shorten the learning curve of doing business in a new market. “There’s a lot of stuff to navigate,” he said. “Different regulations, different rules, different clients.”

deBanked first began exploring the Australian market in 2015. At the time, there were about 20 alternative lenders operating in the country. Since then the market has flourished. The population of Australia is only 26 million people, about two-thirds that of Canada, but Goldin said that it’s not as competitive.

“The US is bigger but also 50x the competition,” he said.

For anyone interested in this opportunity, the best way to contact him is through LinkedIn. The original post can be found here.

How the Amazon / Parafin Merchant Cash Advance Deal Came to Be

November 2, 2022
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Back in December, Parafin, then a fintech startup with 20 employees, submitted a proposal to Amazon to roll out a potential Amazon merchant cash advance product. At the time, Parafin was little known to the general public and its surprise deal with DoorDash wouldn’t even become public until a month later.

AmazonThe prospect of an MCA would not have been foreign to Amazon given that the company already offers direct business loans, lines of credit through Marcus by Goldman Sachs, and other loans thanks to a successful pilot with Lendistry. But the team behind Parafin were virtual unknowns in the merchant cash advance industry itself. The company’s 3 co-founders, including CEO Sahill Poddar, all hail from Robinhood, the investment app that became wildly popular especially with younger adults over the last several years.

Coincidentally, more than a dozen people employed by Parafin, including the co-founders, are former Robinhood employees, according to profiles reviewed on LinkedIn. It’s part of a trend, it appears, as other members of their team hail from well known Silicon Valley firms like Lending Club, Stripe, Funding Circle, Google, Amazon, Facebook, StreetShares, and more.

Ultimately, Parafin’s big bet paid off. On Tuesday, November 1st, Amazon announced that the Parafin team was the one it had chosen to debut its official merchant cash advance product.

“Amazon is committed to providing convenient and flexible access to capital for our sellers, regardless of their size,” said Tai Koottatep, director and general manager, Amazon WW B2B Payments & Lending, in the announcement. “Today’s launch is another milestone in strengthening Amazon’s commitment to sellers, and builds on the strong portfolio of financial solutions we already provide. This latest offering significantly expands sellers’ reach and capabilities, and broadens their access to capital in a flexible way—one that helps them control their cashflow, and by extension, their entire business.”

“We founded Parafin with the mission to grow small businesses, and we’re thrilled that we have the opportunity to do that by providing Amazon sellers with this merchant cash advance option,” said Vineet Goel, co-founder of Parafin. “It’s a privilege to count ourselves among Amazon’s suite of financial solutions, and we look forward to making a difference for sellers looking to expand their business.”

The product is already listed on Amazon’s website and was rolled out to some US businesses immediately. It will be available to hundreds of thousands of additional sellers by early 2023, the company claims.

available products on amazon

Unique to an Amazon MCA is that funding amounts can start as low as $500 and go up to $10 million.

Amazon’s entrance into the merchant cash advance market coincides wih a unique moment in the product’s history as several states are in the midst of imposing strict regulations on their sale.

Broker Fair 2022 Photos

October 25, 2022
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The Broker Fair 2022 Photos can be FOUND HERE. Thank you so much to all the sponsors and attendees!

Broker Fair 2022

Ready for what’s next? deBanked returns to Miami Beach on January 19th! Registration is now open. For questions, email

Lavu Adds MCA Product Through Partnership With Parafin

October 7, 2022
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LavuIt’s not just DoorDash that Parafin has partnered up with to provide MCA funding. Last week, the restaurant software company Lavu launched Lavu Capital to help restaurants owners access capital.

“We are a restaurant software company that focuses on small and medium restaurants,” said Saleem S. Khatri, CEO of Lavu. “Think of your favorite restaurants that have one or two locations that are really really popular, that are ingrained in the community. We do everything from point of sale to online ordering, payment processing, and anything a restaurant would need to start and grow their business.”

Khatri said that one thing they noticed is that these restaurants have a fundamentally hard time getting loans and that led them to connect with Parafin. Parafin’s product is an advance on future sales, not a loan, and their offerings have been simply integrated into Lavu’s technology. Parafin automatically generates an offer for restaurant owners that they can see in their Lavu dashboard.

“…it’s just really beautifully designed,” said Khatri. “It basically says, ‘Hey, you have an offer to borrow up to $5,000. Do you want it yes or no?’ And you just click ‘yes’ and you’re good to go, the money deposits straight into your bank account, and then you have a repayment schedule. And it just pulls it directly from your bank account according to that repayment schedule.”

Khatri says they haven’t really begun to market the product yet and they’ve just started off with a limited base of customers but that the plan is to roll it out to all their customers around the US. They’d even do it with their customers outside of the US if they could, but the tech is not set up to do that just yet.

“This is going to be a feature and an offering that really really benefits our customers because it gets to the heart of what they need, which is they’re in constant need of liquidity, they’re in constant need of kind of tools to run their business better,” Khatri said. “And it just really fits our portfolio of products that we offer to these customers. So the reception has been awesome.”

Think The New California Disclosure Law is Just About a Disclosure Form? Think Again

September 13, 2022
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California Lending“We’re one of the good guys so of course we’ll comply and include the form with our contracts.”

Variations of the above phrase have been oft-repeated in the last few months by participants in the commercial finance industry when queried by deBanked about California’s new disclosure law. Several companies have shared that they are prepared for what’s to come, but are they? The regulations go into effect on December 9th and begin a new chapter of compliance for the industry.

Though one might be aware that California will require specific disclosures on commercial finance contracts (including purchases of future sales), Katherine C. Fisher, Partner at Hudson Cook, LLP, explained that the breadth of the state’s law will likely require changes to a funding company’s operational processes as well. Fisher told deBanked that there’s not just the matter of disclosing but also the matter of what triggers a disclosure having to be made. What might otherwise be considered the normal discourse between a funding provider and a customer prior to a deal being consummated is now an area requiring close examination.

“If a broker sends a text to a merchant with the offers, could it trigger this?” is one scenario she posed about the threshold for disclosure.

The funding provider needs to know the answer because once the disclosure requirement is triggered, the broker needs to relay back the details of the offers made, the specific disclosures provided, and the timestamp of when this took place. All of this data then needs be stored by the funding provider to maintain compliance.

And funding providers will need to be vigilant.

“The funder is responsible for broker compliance,” Fisher said.

The entire process of who-said-what, when, and how will suddenly become a realm requiring tight control it seems. And that all comes back to the form itself, which is not all that simple either.

merchant cash advance APRCalifornia will require funding providers to estimate an APR on a purchase transaction using one of two methods: the Historical Method or the Underwriting Method. While the methodology selected is probably best left to qualified counsel to assist with, the likely deviation of a future estimated APR from a backwards-looking APR was a reality considered by state regulators. To bridge this gap, California requires that funding providers disclose reasonably anticipated true-up scenarios. A true-up in this instance refers to the already well-established option for a merchant to perform a monthly reconciliation of payments if the amount collected is above or below the purchased percentage specified in the contract.

Though the very nature of the reconciliation is a consequence of not being able to predict the future exactly, California’s law requires that funding providers disclose the dates and amounts of the true-ups that they reasonably anticipate. Such concepts and mathematics, once perhaps the subjective domain of a funding provider’s in-house underwriters will soon be subject to regulatory scrutiny for total accuracy. And this just scratches the surface.

The scope of this law is so unique and technical that the Hudson Cook law firm spent a considerable amount of time preparing a guide on this very subject. deBanked saw some of the pages of this guide during a call.

Fisher, meanwhile, insisted that compliance in California is different than compliance with the law recently enacted in Virginia and that if funding providers wait until December to begin preparing, it will probably be too late to be ready in time.

“This is more than just a form,” Fisher said. “You need to spread the word about it.”

Why is a Recession Good for the MCA Industry?

August 30, 2022

A great recession will not be an enemy for the MCA industry – Inflation is

This is a joint guest post by Yoel Wagschal and Isaac Wagschal, the CFO and CEO respectively of One Percent Ventures

One Percent Ventures Execs

recessionThe MCA industry has strived for many years to overcome tremendous challenges. Interestingly, many in the industry – especially the many new “rookie funders” – are very nervous about the looming recession. In this article, we will attempt to calm nerves and delve in detail about how high inflation rates have affected the MCA space. More importantly, we will address how the inevitable recession will actually be good for the industry – if we play it right.

A Changing Environment

Funders and ISOs alike must be superefficient in working within the MCA guidelines, so they can avoid collapsing in the coming recession. The MCA game has drastically changed in recent years. The product, the rules, the accepted norms, and even the actual laws have changed. It is only natural that many of the “new funders” won’t have a complete grasp of the very original merchant cash advance product, and what made it work. Unless a funder has a complete understanding of why and how something works, they won’t know why and how it cannot work. Before we directly address the status of the current inflation, and discuss how to prepare for the recession, lets briefly go back and talk about the original merchant cash advance product.

The Monkey’s Ladder

It reminds us of an old parable where a scientist placed a ladder with a bunch of bananas on top of it, in the center of a cage full of monkeys. Whenever one of them attempted to climb the ladder, the scientist sprayed all of the monkeys with icy water. Eventually, whenever a monkey took a first step onto the ladder, the others would pull him off and give him a beating, because they wanted to avoid the icy water. The scientist then substituted one of the monkeys with a new one, who naturally jumped on the ladder as soon as he entered the cage and noticed the bananas. He immediately received a proper beating and learned to never go up the ladder – but he never learned why. Eventually all the monkeys were replaced, and the new monkeys learned not to climb the ladder, but no one knew why. Here, we will attempt to inform our new monkeys, I mean funders, about why we do things the way we do. When the recession finally hits, at least they will know to prepare a raincoat before the icy water hits them in the face.

Bob’s Pizza

The original merchant cash advance recipient was a hard-working pizza shop owner named Bob. Unfortunately for him, his oven broke, and the replacement cost was ten thousand dollars. Bob didn’t have good enough credit for traditional financing options. Of course, without a pizza oven Bob’s business faced an imminent demise. As a last-ditch effort, he contacted a factoring company, who funded businesses with their existing receivables, and asked if they would consider funding “future” receivables. The funder reviewed Bob’s file and immediately identified Bob’s bad credit, which was why no bank wanted to take a risk on Bob’s Pizza. The funder calculated that if the big banks had been able to legally charge a much higher APR, they may have taken the risk on Bob after all. The reality – it was the funding price that limited Bob’s credit options, not his bad credit.

This funder happened to be a “softy” and since the factoring industry was not limited to what the usury laws allow, he decided to come up with a solution that worked for both parties. To make the long story short, the funder offered to take a risk and fund the crucial pizza oven, by purchasing the future sales of Bob’s pizzas. The funder would do this if Bob was willing to pay a 1.49 factor rate, and let the funder draw a small percentage of Bob’s daily sales as payment. The funder determined that the pizza shop generated enough sales to cover the cost of the oven by paying just a small percentage of the running daily sales.

The funder believed the risk was minimal, and the rate balanced out the risk that Bob’s Pizza would default before the oven was paid off. Bob figured out that the cost for the oven was not ten but fifteen thousand dollars because of the funding arrangement. Bob believed it a relatively small charge to pay the additional five thousand dollars, in order to get the ten thousand dollars needed to buy his oven. After all, without the oven, his business would fail.

MCA in the Post-Covid19 Era

A lot has changed since Bob received the first MCA. For the purposes of this inflation-recession conversation, let’s skip to the current post-Covid19 era of the MCA space. First, the basic economic concept involved is that the need for a high-cost funding product such as an MCA peaks when interest rates are generally high and there’s a tight credit market on main street. Those in the high-risk bracket will find it even more difficult to obtain financing, and will seek out an MCA. Reversely, the demand for the MCA product is lowest when interest rates are low, and it is easier for a business to access credit. Even if Bob himself doesn’t have direct access to credit, if the oven supplier has easier access to financing, they will offer an in-house finance option directly to Bob. He won’t need to sell his future pizza pies at 1.49 factor rates for an MCA funder to replace his pizza oven.

How do these basic foundational MCA concepts line up with actual historical events in the space? The economic boom leading up to Covid19 saw record low interest rates and unemployment, which caused a drastic drop in the demand for high-cost funding. In reaction, the MCA space normalized stacking. As a direct result of the imbalance in supply and demand, funders added the option to fund multiple positions. Post-Covid19, the government issued many rounds of PPP and EIDL loans, and the demand for MCA money plummeted to the lowest point in the history of the industry. This also explains the high inflation rates we currently experience. With easier access to money, more people spend more money, which drives up the prices to access money, through the old economic law of supply and demand. However, by this theory, we should have seen a sharp decline in the number of MCA funders. Unexpectedly, the outcome has been the opposite. Since Covid19, funders have opened at a rate faster than ever seen before in the MCA space.

In fact, the opening of brand-new funders has proportionally outpaced the opening of brand-new merchants.

Investing Changes Post-Covid19

The reason for this outcome is simple. When more people have access to money, more people invest money. A lot of people choose cryptocurrency as their easy ride to riches, others have an appetite for the MCA space. Each time a funder opens shop, they add to the overall supply within the MCA space, which aggravates the already stressed demand imbalance. The new funders who came into the space carrying large bags of money from investors weren’t willing to simply return the unopened bags – they wanted to fund. To overcome the lack of demand, these new funders relaxed the underwriting standards. It is now normal to see new funders advertise “we fund defaults.” As a result, many lead generators have stopped creating leads for new merchants. Instead the focus is officially on UCC filings, defaults, etc. These people are basically saying they have given up on expanding the MCA market share, and rely on rerouting the same leads over and over like the game of musical chairs.

A New Era For Bob

Not so long ago all reputable funders funded only 1st positions. Now many of the new funders officially do not fund 1st positions, they only fund a merchant who is a proven payer to a big funder. By this logic, Bob would not have received funding for his pizza oven from most of the new funders. But the truth is that Bob was helped many years ago, and wouldn’t need funding in the current environment, after he wisely saved his PPP and other loans. But, given that he once received an MCA, a lead generator dug him up and Bob was a fresh lead once again.

After receiving many unsolicited offers, Bob realized that the supply and demand imbalance had flipped the game upside down. This was a new era where the demand for merchants was higher than for funding. With such feelings of empowerment, Bob couldn’t resist the offers and decided to take a deal. However, he was determined not to touch the funds. Bob decided to use the funds only to make the payments and build solid MCA credit for a rainy day. The UCC filing chasers picked up on Bob’s situation, and guess what, within a few short weeks, Bob was receiving 2nd position offers.

At first Bob relentlessly refused the offers. He didn’t feel comfortable committing too much of his daily sales that he needed for rent, payroll, and pizza ingredients. Bob soon realized that in the current MCA era, as long as he maneuvered to move his money around so that his bank statements met the new robotic guidelines of the funders, they would keep funding and renewing him. In fact, given the current state of affairs, Bob now realizes that zero of his actual pizza sales need to be committed, since the many funder’s positions and renewals provide plenty of resources to cover the daily payments, just like an efficient Ponzi scheme.

The Effect on Competition

The tricks to artificially force more demand within the same group of merchants was not exercised by the smart and disciplined funders. Many of the big funders officially slowed down on funding. They haven’t provided a detailed explanation about why they are issuing a lot more declines than usual. Some of the big funders choose to battle with the new funders by competing with them. Those big funders, being fully aware that the new funders shy away from 1st positions, also know that when a new funder receives a bank statement with a daily payment to a big reputable funder, it is almost an automatic certainty that the new funder will want to fund a 2nd position, and 3rd, even a 4th position, etc.

Therefore, the big funder has every reason to go ahead and fund it, considering that the merchant will certainly pay the 1st position to qualify for the many more positions to come. However, the big funder is limited to their publicly advertised policies. They now face a problem trying to even get these types of fundings. If one of their “partners” happens to submit such bad paper, they can’t lower themselves to fund it, because they don’t want to admit to their ISOs how desperate they really are.

To overcome these limitations, those big funders who choose to compete with the new funders open their own little “new funder shops.” These anonymous “new funders” do not have any obligations to the big and reputable ISO shops. These new funders accept all ISOs and all paper. This provides an underground tunnel where the big funder can take part in the slum of the MCA space, where demand for high-priced funding is always rampant, despite the laws of economics. Those big funders then take the data from their very own “new funder shops” and backdoor them back to their “big company.” The submissions are then funded as a 1st position to create an illusion of an excellent file, funded by a reputable brand name funder. Of course, this merchant will receive many offers for many more positions which will provide plenty of cash flow to pay the big funder’s 1st position.

These “big funders” will also at times utilize their “new funder” shops to compete on 2nd and 3rd positions. They will ultimately use the same trick to drop a deal to this merchant from their big company, and rely on the “real new funders” who will undoubtedly jump in to act as reliable cleanup hitters, and drop even more cash to drive the other positions home.

Bob’s New Business

By now Bob no longer operates a genuine pizza shop. He simply does not have the time to manage that business, and quite frankly he doesn’t have to. Bob is now an entrepreneur, with various companies and bank accounts, all of which are of course related to the pizza industry. The influx of funding has given Bob an opportunity to walk away from the hot oven and focus on business – the MCA kiting business. MCA kiting is a phrase coined by OPV. The term is derived from a similar practice in the banking industry known as check kiting. It is a form of fraud where a check is intentionally written for a value greater than the balance in the account. Then a second check is written on a different account, to cover the non-existent funds in the first account. This falsely inflates the balance of a checking account, to allow written checks to clear that would otherwise bounce.

The sales on Bob’s banks statements no longer consist of small amounts that shoppers drop for a slice. We now see large deposits and large expenses coming and going as transfers wires, etc. Bob now even imports and exports flour from international flour mills, which explains the large offshore wires.

Bob remembers the days of working hard in a Pizza shop, so he is determined to do the right thing and keep making money from his new companies. Bob studies the guidelines from the various funders, and he makes sure not to mess up. He is an excellent merchant with a perfect MCA payment history. If Bob keeps the process moving forward, he can get funding every few weeks, skim off the top and save the rest for payments until the next advance. This can mathematically go on and on for a long time, where the funders keep paying the merchant to make payments.

The only time this could become an issue for Bob is if the new funders stop opening new shops and the influx of fresh supply comes to an abrupt halt.

The Impact of a Recession on MCA Kiting

Some economists in the MCA space have expressed concern that the upcoming recession will affect the merchants’ sales, and force them to default on their payments. However, this is not a major concern for the legitimate merchants, since many of them are in essential business markets that will not experience a substantial drop in sales, and thus won’t be greatly affected by a recession. But – it is a huge concern for those in the MCA kiting business like Bob. When the recession hits and interest rates rise to rates not seen in a century, investors will be stressed to the max and seek to pull the “huge profits” that they made in the MCA space. There won’t be an influx of new funders that can be relied upon to bail out the previous positions.

As those MCA-kiting merchants collapse, so will the funders who heavily relied on that part of the market share within the space.

Surviving The Recession

On the other hand, the recession will bring major relief and recovery to those funders, new and old, big and small, who were disciplined throughout the inflation period when demand was low. As mentioned earlier, the reason for high inflation rates is easy access to cash. In order to curb inflation the government will raise interest rates to induce lower inflation, which will restrict the easy access to cash. This will usher in a new era of legitimate merchants that find themselves trapped in a credit crunch, who will seek out the MCA option just like Bob did all those years ago.

During these volatile times it is important to always be mindful that your network is your net worth. As a funder, if a large portion of your portfolio consists of merchants who are playing the MCA kiting scheme, then prepare a raincoat for when the recession hits. On the other hand, if you are a funder that remembers why we do not climb the ladder for the bananas, then you are in a perfect position to survive the upcoming recession. The same goes for ISOs, where building solid relationships with solid companies will be the difference between failure or getting a win during the next great recession.