Is MCA Still New?
July 19, 2022
Recently, I had the pleasure of someone telling me that they were happy to be getting in on the MCA industry while it’s still very new. While I appreciated the irony given that it’s an industry that’s been around for more than 20 years, it prompted me to take a walk down memory lane to understand why someone might truly believe that. On the one hand, industry insiders long ago predicted that the product would prompt new regulations. They were right, but they were just 17 years off, literally. In 2022, new regulations that were imagined in 2005 are FINALLY starting to become reality. Maybe it is still all very new indeed?
But more ironic than that is how certain some people were that the industry had already matured 15 years ago, that it had peaked in 2007. The story was that MCA was some legacy product borne out of the dot com bubble of 2001 that never had a sustainable future and that 2009 and beyond would usher in the era of in-person sales for what would remain of those that didn’t change careers. Computers didn’t even factor into the vision.
Apparently, change and adoption can be slow, but certain products, if they’re meeting a need, have staying power. Below is a few quotes I pulled from the earlier years from various places. I hope you enjoy them:
“The merchant cash advance industry is growing at an astonishing clip.” – October, 2005
“The merchant cash advance industry only has a max of two years left.” – June, 2007
“Once our splits are compatible with First Data, then that means we win. We’ll have conquered the merchant cash advance space.” – July, 2007
“The merchant cash advance space is just a fad.” – August, 2007
“I think the [merchant cash advance] boat has come and gone and I missed it.” – August, 2007
“The cash advance business is going through the tech bubble phase.” – November, 2007
“The merchant cash advance industry has grown too large…” – February, 2008
“Cash advance is clearly a growing trend in the payments industry. But, down the road, will cash advance reach a saturation point at which the value proposition to ISOs and MLSs is no longer a winning proposition?” – February, 2008
“Gone are the days of call centers, phone/fax blasts and mailings and in are the days of meeting and greeting merchants face to face.” – March, 2009
“[Merchant cash advances] are definitely not going to grow like people had hoped, and it’ll be very rare that you’ll find a company like mine really making its money or building its future around this product.” – November, 2009
deBanked Happy Hour is SOLD OUT
July 17, 2022The deBanked happy hour scheduled for July 28th in NYC has hit its registration limit.
Missed out? Register for Broker Fair 2022 taking place on October 24 at the New York Marriott Marquis in Times Square. This is one event that small business finance brokers won’t want to miss!
Thoughts on Inflation, a Recession, and Regulation From Someone Who’s Seen ‘This Movie’ Before
July 7, 2022
“I can tell you that in the US that originators are starting to adjust their underwriting policies,” said David Goldin, CEO of Capify and Head of Originations at Lender Capital Partners, “I don’t know about pricing. I haven’t heard that yet.”
Goldin, who has been a small business finance chief executive for 20 years, believes that the economy, inflation, and interest rates are front-and-center issues that the industry should be thinking about right now. In the UK, one region that Capify operates in, Goldin said that several small business finance executives there are already talking about raising margin and doing shorter term deals to prepare for the increased risk.
“Some originators are smart enough to be proactive and others are saying, ‘oh we’ll just watch it.’ So it’s either going to take trickling down through the economy globally or defaults to go up for these adjustment to happen,” he said.
During the Great Recession of ’08/’09, Goldin was right in the thick of it as the CEO of AmeriMerchant, one of the first MCA companies in the US. He explained that there’s a notable difference between now versus then.
“One of the things that didn’t exist back then, someone doing a second [position] was like unheard of in 2008,” he said. “Now, what is it now? first, 2nd, 3rd, 4th, 5th? 6, 7, 8, 9. It’s like a horse race. Ten horses in the race in some cases. […] You have to be careful, right? You have to make sure you’re covering your margin by charging enough and going shorter.”
But in a competitive environment where nobody wants to reveal their cards or risk losing business, not every funder is keen to start making changes right now. Goldin said that many funding companies will wait to see if their competitors start tightening up first especially if they’re driven by their ISOs and brokers. The downside of becoming more conservative is that brokers might just decide to take all of their business elsewhere.
But a looming recession isn’t all bad. “There are some positives,” he said. “The positives are the banks do tighten up. It’s just a question of when not if. So, you may get applicants that come to alternative financing that may have never taken or considered these types of products because they got bank financing.”
Complicating the landscape now, however, is that funding companies are wrangling with new state regulations. Goldin is aware of several originators that have temporarily paused business in Virginia, for example, where a disclosure requirement went into effect just last week. The soon-to-be implemented New York and California laws are also causing rumblings about funding suspensions respectively. In each of those states it was “sales-based financing” products that were specifically targeted, a trend that looks sure to continue as states like Maryland, Connecticut, and others are determined to reintroduce disclosure legislation next year.
“I think more and more originators will eventually get away from the MCA model,” Goldin said, “and go more towards the business loan model by partnering with a bank. I think you’re going to see more companies trying to implement bank programs to become full business loans and not deal with all the nuances of a state by state and MCA program.”
Goldin’s point of view, wisdom, and predictions are aggressively sobering. Only three months ago, industry sources were telling deBanked that their outlook for 2022 was optimistic and that the end of covid-era government stimulus suggested that there would be growth for non-bank finance companies. Suddenly the tone has shifted, the stock market has plummeted, and interest rates are rising.
“I think if you resurveyed originators now, I think you’d get a different response than you did eight weeks ago or even four weeks ago,” Goldin said. “I can tell you right now that capital providers are asking their originators about how they’re making adjusments in this environment…”
Indeed, deBanked did speak with several players just last week and did notice that the general sentiment had shifted to one of concern and caution.
“I think funders should be thinking about redundancy,” Goldin said. “More than ever the best time to raise capital is when you don’t need it. And I don’t know if [funding sources] will pull lines, yes if defaults go up, but they may not be as inclined to enter into new relationships in this environment.” Because of that, now might be the last best opportunity to secure additional credit sources even they’re not necessarily needed, he suggested.
With that, he said that funders should be thinking about tightening up the bottom of their credit profile, increasing their margins, doing shorter term deals, looking for more mature businesses, and working with businesses with higher credit scores.
“I think that those that don’t make credit adjustments, raise margin, and go shorter are going to have their you-know-what handed to them,” he said. “I’ve seen this movie too many times. It doesn’t have to be called a recession. […] It’s all about affordability to repay, and the more debt [the customers] have, and the more their margins are squeezed, or the more their sales go down. That’s when problems begin. You’re less likely to have a problem if you’re only out six months instead of eighteen months. I’ve used this saying a million times: ‘When the ships are too far out to sea and it’s a tidal wave, you can’t get them back.'”
Virginia Disclosure Law Quietly Goes Into Effect
July 6, 2022
On July 1st, Virginia’s “sales-based financing” disclosure law quietly went into effect. The Delegate from Virginia that introduced it in the first place, Kathy Tran, marked the occasion by retweeting a caucus announcement that it was live. Elsewhere, it was hardly mentioned. It was even absent from the Official Code of Virginia where it was supposed to be ceremoniously entered on July 1st. The State insists that its omission is just a glitch.
“There have been significant technical difficulties during the 2022 code upload process,” reads a notice on the Virginia State Law Portal. “Due to these difficulties, the portal does not currently reflect the changes to enacted law. The Division of Legislative Automated Systems and the publisher are working diligently to resolve these issues as quickly as possible. Once the data is obtained from the publisher in the correct format, the standard quality check of the entire body of law that went into effect July 1 will be conducted.”
The law focuses primarily on disclosures. Sounds simple enough, but in the preceding weeks the draft disclosure form was met with some resistance by potentially covered parties because of how little time there was to integrate it into their systems and processes. Regardless, at least one small business funding company told deBanked off the record that ambiguous language and terms in the law had led to the decision to cease doing business in the State of Virginia, at least for now. Their focus is shifting toward compliance with the upcoming California and New York disclosure laws where the population pools are larger and the soon-to-be enacted requirements are seemingly more complex. Utah too will soon implement its own version of a disclosure law.
For commercial finance brokers, the defining elements of the Virginia law are that commissions earned will have to be disclosed to customers and that they’ll have to register their businesses with the State to even continue doing business there.
RCG Advances Permanently Banned From MCA Business by FTC
June 6, 2022
It’s déjà vu. Five months after the FTC successfully banned someone from engaging in the MCA business, the agency has secured a similar outcome from additional defendants. This time it’s RCG Advances and its operator that are banned, according to the final settlement announced by the parties. In addition, RCG is required to make an upfront payment of $1.5M to the FTC and refund $1.2M to its previous customers that it had allegedly deceived.
The penalty may appear rather small in the big picture, but it is possibly as strong an outcome as the FTC could’ve hoped to obtain given the odd circumstances that befell the case. For example, the FTC filed its suit against RCG in June 2020 under Section 13(b) of the FTC Act, one of the most common tools in its legal arsenal. Less than a year later, the Supreme Court of the United States ruled that despite long-standing precedent, 13(b) did not give the FTC legal authority to obtain monetary relief, which from the FTC’s point of view, defeated the entire purpose of bringing such claims. In light of the ruling, the FTC was forced to change its strategy in the RCG case. In May 2021, the FTC asked the Court if it could amend its lawsuit to state that what the defendants had actually done all along was violate the Gramm-Leach-Bliley Act. It was perhaps a more difficult path forward.
By January, the first settlement was announced. This RCG settlement now follows that. One defendant in the case has not settled and the proceedings are still ongoing.
Who Needs The Merchant Cash Advance Keyword Anyway?
May 31, 2022
Almost five years since Google banned its search engine from displaying ads when queries contain the phrase “cash advance,” the loss of business attributed to that has probably been nil to the small business finance space.
According to Google, despite there being between 100,000 to 1 million searches for “cash advance” each month on average, only 1,000 to 10,000 searches per month are specifically for “merchant cash advance.”
People are ~10x more likely to search for business line of credit, business loan, working capital, or business credit card, according to Google’s estimates.
This is somewhat in line with findings from the Federal Reserve, whose recent study determined that 7x more business owners seek out a loan or line of credit than they do a merchant cash advance.
But putting that aside, the ban on paid advertising for all things cash advance has had an upside for some lucky companies. Without ads, Google has inadvertently (or maybe intentionally) elevated funding providers that are local to the searcher to the top of the organic results. That means listings on Google Maps that contain keywords matching the search queries are reaping the benefits of being prominently placed at the top of the page and are potentially capturing all the clicks along with it. The end result is an old-fashioned SEO war to win what few searches there are.
Compare that to a search for sba loan where paid advertising is fair game. In the era of PPP and EIDL, it’s perhaps no surprise that there are between 100,000 to 1 million searches per month for that keyword on average. Many of those searchers will probably not be eligible for an SBA loan so perhaps the next best fit would be equipment leasing or invoice factoring, two queries that are on par with merchant cash advance in average monthly searches, meaning volume is relatively low.
But how does low search volume turn into the large volume of funding originated? Well, another factor has changed since Google implemented the cash advance advertising restriction in 2017, and that is that Google is not as relevant as it used to be. Business owners are more likely to discover a potential capital source from social media or a fintech platform they already have a relationship with than ever before. According to a recent study, 25% of people claimed they had actually used either Alexa, Siri, or another voice assistant to find information about financial services, signaling a major departure from how traditional searching used to be conducted.
All of which means that the paid advertising restriction on a niche keyword on Google is unlikely to make any kind of difference in the big picture. Odds are you might not have known this restriction even existed. Bing, on the other hand, has no qualms with cash advances and allows paid advertising on it.
The Real Small Business Funding Demand Has Yet to Kick In
May 26, 2022
Now that small and medium sized businesses received crucial PPP and EIDL funding during the COVID-19 pandemic, they have become more familiar with other options to obtain capital.
“…they’re learning that they can borrow money based on their revenue, not based on their credit and assets,” stated Sean Feighan, Co-founder and President of Cash Buoy. Feighan explained that the exercise of obtaining capital during Covid to stay in business created or further developed an appetite for small businesses to borrow money in general.
As these businesses are still utilizing the remaining government aid, the real demand has not truly begun, according to Dylan J Howell, CEO of Liquidibee. “…we have yet to see the real big demand that’s about to kick in, in my opinion, over the next six to twelve months, I believe that a lot more demand will come in,” Howell said. “A lot of companies received a good injection of government stimulus. And they’ve enjoyed that over the last year, year and a half. And as that comes to an end, companies are always looking for additional capital, whether it be to grow or foster future growth of their company.”
“I think we’re beginning now to see a new phase within small business,” said Avi Wernick, VP of Partnerships at FinTap. Because of the money that’s still lingering from the stimulus efforts, he thinks that alternative finance companies will soon see more demand in the coming months. But at the same time, those finance companies will have to determine if they’re even a good fit for their products. “I think some businesses will be more adversely affected. I think it depends a lot on the nature of the business owners, you know there are better business owners out there that are able to manage [their] finances more responsibly, and there are others that are kind of just more reactive.”
Erez Stamler, CEO and Managing Director of Fresh Funding, echoed a similar sentiment. He said that increased risk factors of a business coming out of Covid can make it harder to get them approved. Besides, a business now predisposed to forgivable funding or ultra long terms at very low interest may not necessarily demand other products in the market.
“So you will see demand, but you might not see increased amount of views or volume of deals, because you can’t replace SBA loans with MCA,” Stamler said.
DoorDash Capital Warrants No Mention in Latest Report
May 23, 2022Readers interested in hearing the results of DoorDash’s foray in to MCA funding were keenly disappointed by the last earnings call. It didn’t even come up. The product was formally announced by DoorDash on February 9th. At the time, the company said that it was offering DoorDash merchants MCAs through a partner company named Parafin. The offers would be visible right in the DoorDash portal.
DoorDash reported Q1 revenue of $1.5B and a net loss of $167M. The material impact of DoorDash Capital, only in its infancy, was likely minimal then.
