merchant funding
Is PayPal’s Working Capital Program a Mistake?
October 5, 2013
A few weeks ago, PayPal announced the launch of their Working Capital program as a way to help small businesses in need. They classify it as a loan but the explanation for how it works is textbook merchant cash advance. A percentage of each PayPal sale is withheld and applied as a reduction to the merchant’s balance. PayPal joining the booming merchant cash advance/alternative lending market is really no surprise. After all, RapidAdvance just got acquired by the same group that owns Quicken Loans. We’re in a new era of alternative finance.
PayPal is respected as a payments company but are they ready for the high risk world of merchant cash advance financing? Critics are not so sure. Industry insiders have watched dozens of funding providers jump into the market with aggressive rates, attempt to undercut the competition, and acquire a lot of marketshare. The results are usually disastrous.
For years, journalists believed that the high cost of capital provided by non-bank lenders was fueled by the desire for immense profit. They didn’t understand the risks involved or realize that some funding providers weren’t even turning a profit at all. Last year, Opportunity Fund, a non-profit small business lender revealed that to make loans at 12% APR would fail to even cover costs. The for-profit sector of the industry charges factor rates (different than Annual Percentage Rates) between 1.14 and 1.50, not including fees. I explained this variance once before in The Fork in the Merchant Cash Advance Road.
So did PayPal learn anything from an industry that has been in existence for 15 years? It doesn’t look like it:
Doing some simple math (Total to be repaid / Loan Amount), the factor rates range from 1.04 to 1.12, figures that will probably only make sense if their average client has greater than 720 FICO, many years in business, and is virtually perfect on paper and in reality. Perhaps PayPal knows that and will decline 95% of applications or perhaps they believe their clients will buck the trend. I mean, is it possible that a corporate monster like PayPal could make a boneheaded mistake?
A 1.04 deal? Seriously? This has disaster written all over it. There are some people that believe that the losing proposition is intentional…
You can follow the discussion about this on DailyFunder.
The Search for a Bad Credit Startup Loan
October 1, 2013Are you trying to start a business despite having no income, bad credit, and no collateral? Well I’ve got news for you… and it isn’t good. There isn’t any hope for you to get a loan. None. Call me a pessimist or a sensationalist for saying so. Heck, I dare someone to prove me wrong! If there is something out there that even exists for people in that situation, be sure to also explain why undertaking such risk would be viable. Let me reiterate the circumstances again:
So why this example? Well it just so happens thousands of people per day that face all 3 circumstances at once are applying online for business loans. How do I know this? I’m in the lending business. I’ve experienced it firsthand in sales and have also amassed the data through a venture I operate. First let me applaud the entrepreneurs that are making an effort to do something. Some folks believe that people with no job and bad credit just sit at home all day waiting for an unemployment check to come in. That doesn’t seem to be the case at all, not by a long shot. People want to work and when they can’t find a job, they’re trying to start a business. Thousands, tens of thousands, or perhaps even millions of people are saying “Hey you know what? My situation sucks, so I’m going to try and open that store I’ve always dreamed of. I have nothing else to lose.” And that’s great but that’s also the problem. Someone that has absolutely nothing to lose has absolutely nothing to offer a lender.
There are those that are dreamers who pursue their business idea thinking they’re going to get a $2 million loan at 4% interest. They interpret ads that say business loans UP TO $2 million as something of a borrower’s choice instead of the lender’s cap for the most qualified applicant in the world. Believe me, there are actually people with no income, bad credit, and no collateral that will not settle for less than the $2 million stated loan cap. And there are those that accept their predicament of not being credit worthy and broke and apply for a small loan with a very high rate of interest. There’s a still a flaw in that plan though since you can’t even get a payday loan if you don’t actually have a pay day.
Some applicants see this as a challenge. If they just search the Internet long enough and hard enough then surely someone will give them a loan, even if it’s expensive. My belief is that if there is a lender that is willing to give you a loan when you don’t have a business, don’t have an income, don’t have collateral to offer, and have a history of not repaying debts, then it is likely a scam. They’ll ask you for money upfront to secure getting the loan, a hustle known as an advance fee loan scam.
I partially blame search engines for keeping loan hopes alive for someone that has no income, no collateral, and bad credit. Some merchant cash advance companies tell it like it is though in their advertising and are still overwhelmed by startups that have no shot.
Search engines present links and ads that allude that ANYTHING is possible, but the responders to one search result in a Yahoo Answers question seem to understand reality. One commenter emphasizes that if you got a loan with bad credit, no job, no co-signer, and no checking account, then you’d best get it on film since it would be an act of divine intervention.
But Yahoo Answers is just one result in Google’s endless link options and searchers are likely to disregard it.
If you’re familiar with Google’s knowledge graph and the coming age of Semantic Search, I’d advise they get right to the point to save a lot of people time and energy. I mean if you search for what is a manual imprinter? Google will literally get right to the point and spell it out for you. Notice the authoritative source for this definition below:
Since Google trusts our content so intently, I’d like to add the following to their worldwide library of facts:
Is there an opportunity here?
No one is serving the incomeless, creditless, and assetless loan market… my God is there an opportunity here?! Kind of… but not with loans. There is a lot this massive market could benefit from and that’s guidance. A loan is out of the question, but it doesn’t mean these distressed entrepreneurs can’t get their hands on capital. Crowdfunding is a term that a lot of people throw around but startups shy away from it. I mean… what is crowdfunding really? Sites like Kickstarter and Indiegogo allow people to pitch their ideas to try to raise donations. If enough donations are pledged to meet the entrepreneur’s goal, the money is granted to the entrepreneur. If the donation goal is not reached, the money is returned to the donors.
What I like to think is different between myself and your average journalist on this topic is that I have been down this road. If you’re wondering who in the world is going to donate funds to launch your startup, project, or product idea, you should know that I have done just that. About a month ago, time expired on an Indiegogo campaign to produce an Ubuntu phone. Ubuntu is a Linux OS distribution. It’s like Mac OS or Windows, except it’s neither of those, it’s Linux. Ubuntu believed there was demand for their distro on the mobile platform. In an iOS and Android world, who says there’s not room for one more? Ubuntu users tend to be passionate about their systems and so Ubuntu called on everyday people to take their product to the mobile level.
$12,814,196 was raised but they fell short of the $32 million goal so the funds were returned to the donors. I was one of those donors.
Now you may only need $5,000 or $10,000 or $20,000 and that’s probably a whole lot easier than $32 million. If your business is really viable in the first place, then pitching it on a crowdfunding site is the best trial run you could possibly hope for. Get people emotionally invested or excited about your business. Go nuts promoting your campaign on social media and on blogs. If you can’t get anyone to care about your campaign through crowdfunding though, then you need to seriously consider how you would somehow make people care about your business once it’s operational. I didn’t donate money to the Ubuntu phone project just because it was posted on the site, I did it because I felt like I couldn’t imagine a world where there wasn’t an Ubuntu phone. I became emotionally invested in it.
Supplementary solutions
In my experience, many individuals applying for a startup loan want to address issues like their bad credit, not being incorporated, and not having a business plan until AFTER they get the money. Not all, but many think these are roadblocks or tricks to get them to shell out money they don’t have. They want a guarantee that if they do X, then they will be approved for Y, but it doesn’t work that way. Sometimes you have get your ducks in a row just to make the case that you are credit worthy even if it’s ultimately decided that you are not. Stinks right? That’s the way it goes though.
No income, bad credit, BUT you have collateral
I may have started my rant by painting an apocalyptic picture for startups faced with 3 terrible circumstances, but there is light in the darkness if you’re shooting only 2 for 3. If you’ve got collateral, that’s awesome. My question is though, what do you have? You might be able to get a title loan with your car or a pawn loan for your valuables. I didn’t say the heavens were opening up with these choices, but the possibilities are. Lenders like Borro will actually let you put your jewelry, artwork, antiques, diamonds, gold, or luxury automobiles up as collateral for a short term loan. The only downside is that they will actually come and pick up the item(s) for safekeeping to make sure you pay. And if you don’t, they’ll sell the item(s) off to make up the difference. But hey, if you fully plan on paying back the loan, then what’s the problem?
You have an income, but you have bad credit
This is a start. Having a steady income just upped your chances of repaying a loan. The bad credit is still a problem though, a big one. Mainstream lenders and mainstream alternative lenders are a long shot because the FICO scoring model predicts with high likelihood that you will become delinquent on your payments. Payday lenders are in reach with an income, but they’re probably not a good source for startup capital. How much can you really do with $500 to $2,000 anyway? Just the act of incorporating can run $500.
You have both income and really good credit
This is the only point where the merchant cash advance industry has a chance to find common ground with startups. People have been asking me for years about what in the heck to do about all the startups that flood their phone lines and mob their websites. First the question was about how to make them go away, then how to sell them products to help get their businesses started, then how to find someone who will lend to them, and the back again to how to make them go away. The consensus is that no one will fund startups. Well, some will say they do but as long as they are in business already and can show documented sales history and bank statements. 99% of startups that apply for a loan in the merchant cash advance arena haven’t gotten that far yet though.
A 600 FICO is not a good credit score. Maybe some folks in the merchant cash advance industry will tell you that it is but in the traditional lending world this score is crap. If you have good credit (700+) and a verifiable income, you can in fact get a loan to start a business. It won’t be a true business loan though, perhaps to the dismay of entrepreneurs that falsely believe they can set up a legal entity to shield them from any liability to guarantee it. It will be a personal loan that is personally guaranteed.
This is the point where a regular journalist would cite a random press release about all the startup loans available to small businesses even though they have no idea what’s involved or how true it is. Much like my personal experience with Indiegogo above, I have personally succeeded in taking applicants with no operational or functional business and helped them get a loan. It hasn’t been a lot of people and there’s very little money to be made in it from a reseller standpoint but startup loans exist. I’ve done it with Prosper and Lending Club, but I should warn you, they are very strict on credit criteria and manually underwrite files like a bank would. The only difference is that it’s faster and there are realistic odds of approval.
I didn’t particularly like my experience with Prosper, mainly because they seemed to harbor ill will towards the merchant cash advance industry. This was communicated to me in my conversations with them and as such the decline rate on applicants I referred to them neared a whopping 99%. My experience with Lending Club was a little bit better, in part perhaps because of their recent backing by Google. The last time I ran the numbers, they had approved 11.1% of my deals. To an entrepreneur this success rate probably sounds horrible, but compare it to the 0% approval rate for a startup loan with a merchant cash advance company.
Entrepreneurs with really good credit and an income can up the approval rate by trying another channel, the credit card. Just know that even if you get it in the name of the business, it’s going to be personally guaranteed. And how do I know that you can get a business credit card for a startup? There’s that experience thing again… When I was starting a business, I was able to get a business credit card with a decent sized line just because I had good credit and sufficient income. They didn’t care so much about the business itself, so long as I met their other criteria. You will need to be incorporated and have all of your business ducks in a row though to make this happen.
You have a very young operating business
Once you cross the threshold from a startup business with no sales to a startup business with sales, supporting business documents, and bank statements, well then congratulations because you’ve finally entered the realm of being eligible for a merchant cash advance. You’re not guaranteed an approval and there are still minimum criteria to be met depending on where you apply. Credit may or may not be a factor. Sales volume will make a major difference in what you’re eligible for. Most funders require an absolute minimum of $10,000 in monthly gross sales. The rates will be less than ideal and you’ll likely have to settle for less than the lender’s $2 million loan maximum. $10,000 in monthly gross sales might only equate to a $5,000 approval.
If you’re looking for that real shot in the arm, like a million dollars on really low sales volume, then you could always try the equity game and pitch investors like on Shark Tank:
If you had to ask Billionaire Mark Cuban where to get a startup loan, he’d say not to bother with one at all. Good credit? Bad credit? It doesn’t matter. So many startups fail so why would you risk screwing yourself over with debt if things just don’t work out?
I agree with Cuban’s comments in the video that it’s a hell of a risk to a take out a loan when you’re just getting started and lenders look at it the same way… one giant hell of a risk.
That’s why I shake my head when I see applicants out there with no income, bad credit, and no collateral applying for loans on any and every lending website on the Internet. The odds of an approval no matter what the advertisement says is astronomically low. I don’t think startup loans for applicants like that exist and I invite anyone to prove me wrong.
I’m serious about this. E-mail me at Sean@merchantprocessingresource.com
RapidAdvance Becomes Part of The Quicken Loans Family
September 18, 2013This is a follow up to the RapidAdvance/Rockbridge Growth Equity announcement a couple days ago. We now know that RapidAdvance got an enterprise valuation in excess of $100 million. RapidAdvance will become part of the Quicken Loans Family of Companies. Jeremy Brown will be continuing his role as CEO. I share his feelings on this transaction being especially historic because it is the first non-distressed acquisition of a merchant cash advance company. See the letter that was e-mailed below:
Loans for Likes
September 17, 2013How Kabbage is building a social media marketing empire
Take a look at what Kabbage has cooked up:
Like Kabbage on twitter or Facebook and your approval amount gets extended automatically. This helps Kabbage accomplish two goals:
1. Spread awareness about their brand to the followers of the people Liking and following them.
2. Identify the public social media accounts the business is using so it can monitor what they’re doing.
You can learn about how Kabbage feels about businesses that aren’t using social media in the patent’s summary. Under Description, Section 2:
Social networking is growing at an exponential rate and businesses that are not exploiting social networking sites such as FACEBOOK and LINKEDIN are considered falling behind the times.
So why is this a patentable invention? A merchant’s approval amount is increased automatically by an algorithm that checks to see if a merchant performed the action of Liking or Following. So if you think that’s a great idea and want to do something similar, you’re a bit late. Better Call Saul… I mean Kabbage to license the use of such technology. It works as such:
The above aspects can be obtained by a system that includes (a) approving, by a cash provider, a user for a cash line wherein the user is permitted to receive cash up to the cash line; (b) causing an offer to be displayed on an electronic output device associated with a user’s computer, the offer being to increase the cash line when the user takes a particular action comprising associating the user’s social networking account with the cash provider; (c) determining that the user has taken the particular action; and (d) automatically increasing the cash line.
The term merchant cash advance is explicitly used twice in the patent but it also goes to cover any kind credit line or loan being program. This is actually an incredible patent to be in possession of because it’s such a great idea. Imagine telling a merchant approved for 5k, that they will get an extra $200 just for following you on twitter and another $200 just for liking you on facebook. It may not seem like much on a $250,000 deal but Kabbage does a lot of smaller sized advances where the $400 combined approval bump is a sweet incentive for merchants.
Marketing in this industry is expensive and this is one of the more innovative models I’ve seen.
No End in Sight for Alternative Lending
September 17, 2013
Which one of these three isn’t like the other two?
- Quicken Loans
- RapidAdvance
- Cleveland Cavaliers
It’s a trick question because as of September 16, 2013, All three are owned by Rockbridge Growth Equity, a Detroit-based private equity firm. RapidAdvance announced the acquisition over the news wire, shocking many people around the industry. The move opens RapidAdvance to the connections and prowess of Dan Gilbert, the 126th richest man in the United States. Gilbert is worth approximately $3.9 Billion, is the founder of Quicken Loans, and he owns 4 sports teams, including the NBA’s Cleveland Cavaliers.
Compare that to On Deck Capital board member Peter Thiel, who is worth $1.9 Billion and is the 309th richest person in the U.S. You may remember Thiel, the co-founder of PayPal and first investor in Facebook as participating in a series D round for On Deck Capital along with Google Ventures back in May.
These are truly some historic times. Two of the richest people on all of planet Earth have stock in the merchant cash advance industry. Does that tell you anything about the direction things are moving in? Think about that one again… Two of the richest men in the world have invested in the merchant cash advance industry.
Four years ago, an influential friend advised me that this industry would be eradicated by 2010. As told through The Bubble That Wasn’t, some people left the business prematurely fearing the best days of alternative lending were over. At present, it looks as if those best days are still yet to come.
The Rockbridge Growth Equity move comes less than a year after Steven Mandis bought into RapidAdvance. He will reportedly stay on as a shareholder.
On Deck Capital
In other news, On Deck Capital announced that they’ve raised another $130 million in debt financing, leveraging themselves out even further. ISOs in the industry report that they’re ON FIRE with approvals. Rumors about a possible IPO on the horizon are starting to pick up again but my sources tell me that isn’t likely to happen with On Deck for another 2-3 years.
Alternative Lending: People are Finally Getting it
September 12, 2013
Alternative lending is all the rage these days and so much so that BusinessWeek asked the question: What Do Small Businesses Need Banks for Anyway?. They go on to name many companies with ties to the merchant cash advance industry, which is no surprise to us of course. It is interesting however to notice that the mainstream media is not only giving us the time of the day, but starting to treat us like royalty.
Five and a half years ago this very same collective of lenders were referred to as bottom feeding vampires¹. Over the next couple years they upgraded us to a very expensive alternative, then to an acceptable alternative, and now finally to who the hell needs banks when you have these great companies?!. You have to laugh just a little bit at the shift.
It’s easy to call a lender that charges high rates a bad seed when you have no sense of the context. The reality in lending is that a material amount of borrowers don’t make their payments on time or they don’t pay back the loan at all. That causes rates to go up to compensate for the losses. Critics argue that borrowers can’t make the payments or default because the rates were too high to begin with. Some lenders cave to that assumption and position themselves as a fair lender by undercutting the market rates. They eventually learn that defaults are less related to the cost of the loan and more so tied to a borrower’s willingness to repay or ability to repay. Meaning, loans with no interest tacked on to the principle will still be rocked by late payers and defaults. Wait, seriously?
Yes, welcome to America where sometimes borrowers face circumstances beyond their control or they maliciously decide they don’t want to pay. The overwhelming majority are in the former camp, the ones where sudden or gradual hardship is interfering with their ability to make good on their commitment. I admit, even I feel uncomfortable mentioning this. Nobody wants to be seen as picking on borrowers. We’d all rather pretend that lenders are inherently bad and borrowers are inherently innocent. The truth is that most lenders and borrowers are good but some lenders and borrowers are bad. Lending is a two way street and what’s fair for all is somewhere in the middle.
My friends in the commercial banking sector tell me their tolerance for bad debt is less than 1%. Even 1 single loan default over the course of a year could cause their entire portfolio performance to come crumbling down. They do make loans, but they’re often in the tens of millions or hundreds of millions of dollars and only to large established businesses that quite often, don’t even need the capital but would rather not jeopardize their liquidity by spending their own cash. Some of these loans end up getting classified as small business loans even though there’s nothing small business about them.
Mom and pop shops see the statistics and the corresponding rates of say 4% to 10% APR and set that as the bar to shoot for. Then they head down to their local bank and hit a roadblock. The average small retail/food service business is going to have a greater than 1% chance of default no matter how good it looks on paper. I mean think about it, what are the odds that things will go 99% as planned for a restaurant over the next 12 months? Do you think it’s reasonable to assume there is at least a 5% chance that any of the following could happen in the next year even without knowing anything specific? A failed health inspection, bad reviews published online, a revoked liquor license, construction outside impeding pedestrian traffic, internal damage caused by a flood or disaster, extreme weather hurting sales, major job losses in the area leading to people having lower disposable income, key employees quitting, theft, landlord not renewing the lease, competitor opening up in the neighborhood, or declining sales for no single identifiable reason? Lending money to retail businesses is risky, really risky. Suppose the above business owner had a history of late payments and defaults to begin with. At what cost does it begin to make sense to do this deal? And those are just the risks of what could happen to the business itself, so what about the other risks involved?
To a bank, the stereotypical entrepreneur is damaged goods. The hard knock humble beginnings of turning a vision into a successful business usually comes with personal financial sacrifice and in turn a lower credit score. And just as the successful entrepreneur is getting ready to explain his/her high debt to income ratio and story of triumph, they’re already being declined. Banks don’t care about the story. They care about the aggregate mathematics. If there’s just a 5% chance that the business isn’t going to be where it thinks it will be in a year from now, then the deal’s probably a non-starter. Leveraged? Declined. Poor credit? Declined. Business is running smoothly? Who cares, it’s declined already!
Extension on your taxes? Declined. Showing modest profit or a loss for tax purposes ::wink wink:: ? Declined. Didn’t file a tax return? Declined. Co-mingling funds with your personal finances? Declined. Overdrafts or NSFs? Declined. Unaudited financials? Declined. No collateral? Declined. Doing the books with paper and pen? Declined. Have less than 5 employees? Declined. Can’t find a document the bank wants? Declined. Need the money really badly? Declined. Experiencing a downturn? Declined. Have a tax lien? Declined. Have a criminal record? Declined.
Get the picture? If you take a look at Lending Club, an alternative lender, they’re widely known to have a 90% decline rate. Their maximum interest rate is 29.99% APR. Think about that for a second. Some people would say, “WOW, 30% are you kidding me?” but statistically, Lending Club would be losing money on the deal 9 times out of 10 if they approved every single person that applied. Lending Club actually used to be more liberal with their approvals when they first started and what happened is that too many borrowers just didn’t pay. If you believe that Lending Club should approve even more loan applications than they already do, then they would have to compensate for the increased risk and we’d quickly see APRs reach well into the 40s,50s,and 60s.
A critic might argue that once an applicant exceeds the risk of a 30% APR loan, they probably shouldn’t be getting a loan from anyone. That’s not a bad suggestion and what happened is that when the lending world concurred with that 5 years ago, Americans and politicians went up in arms because “Banks weren’t lending.” No loans? Businesses can’t hire. No loans? Businesses can’t grow. No loans? Economy gets stuck in neutral. The nation demanded that capital flow despite the risks presented to the lenders. And so the finance world heeded the call to provide solutions and came up with a smorgasbord of financial products. Merchant Cash Advance financing was already established but had an especially unique characteristic that allowed it to take off. It structured financing as a sale, not a loan. A big problem was that traditional lenders and alternative lenders were at the mercy of state regulated interest rate caps. Once an applicant reached a certain risk threshold, they just couldn’t do the deal anymore. But when financial companies came in to buy future revenues in exchange for a large chunk of cash upfront, the system started to gain some traction.
The effective cost of the money got high, very high, yet they weren’t predatory. I say that because despite how expensive it seemed, most of them were getting eaten alive by defaults. From 2008 – 2010, many merchant cash advance companies filed for bankruptcy. One of the main attributes of a predatory lender is for the lender to actually be getting filthy rich. That means layering on interest way in excess of a healthy profit. Losing a lot of money to help borrowers and small businesses when no one else will can hardly describe a predatory lender.
One has to wonder that perhaps there is a better way. If unsecured financing breeds high defaults, then surely things would be different if a risky applicant secures the loan with collateral. Have the borrower put skin in the game and we’d have a different outcome right? Lenders such as Borro publicly describe their default rate as falling between 8-10%. They offer collateralized personal loans and are described as a “pawn shop for the posh” in the below video, though most of their clients are small business owners. This tells me that even in the instance where borrowers have something very valuable to lose, a significant percentage of them will not repay the loan in full regardless.
A look around at what merchant cash advance companies have been willing to admit has put their average bad debt between 2-5%. In my experience in this industry however, 8% – 15% is a lot more realistic. But are these funding companies getting filthy rich or treading water? Anyone can look at the financial statements of IOU Central², a lender that’s part of the broader merchant cash advance industry. Since they’re owned by a publicly traded company in Canada, we get to see firsthand that they’re suffering tremendous losses quarter after quarter. I find that to be perfectly in line with what I suggested about undercutting the market earlier. IOU Central’s allure is that their loans cost less than a traditional merchant cash advance. The end result is that after paying commissions to sales agents, paying interest on their capital, and factoring in bad debt, they’re hurting pretty badly.
On Deck Capital too, a company mentioned in the BusinessWeek article above acknowledges that they are not profitable, though they do not make their financials public to verify how unprofitable they are or if that’s really even the case.
An SBA loan through a bank may cost approximately 5.5% APR, but if the loan goes bad, the SBA covers almost all of the bank’s losses. There is no such security blanket in the real private sector. The market determines the rates based on the risk. Each funder measures risk differently and in 2013, there is no longer a one-size-fits-all cost of unsecured funding much like there was in 2007 with merchant cash advances. Compared to a bank loan, almost all of these alternative options will be perceived as expensive, but if banks don’t approve anyone, then they’re a terrible standard for a comparison.
It’s taken a long time for the public and the media to come to terms with that. Banks are still technically in the game but by proxy. They are financing numerous alternative lenders and merchant cash advance companies. Banks shouldn’t be lending out their client’s deposits to really risky businesses anyway. A bank is supposed to be safe. If they’re lending money to 100 businesses and 15 of them aren’t paying it back, then that’s the opposite of safe.
So what do small businesses need banks for anyway? Checking, payroll, overdraft coverage, debit cards, wires, record keeping, CDs etc. There is a place for banks in 2013 and beyond. Alternative lenders charge more and that’s okay. Ultimately it’s up to the borrowers to decide what they can sustain. It is better to have expensive options than no options at all. There’s endless proof of that when credit dried up five years ago. Small businesses cried foul so the market reacted. And here we are now with Kabbage, On Deck Capital, Business Financial Services, and Capital Access Network being portrayed as the norm, the new standard. Almost everything that would cause a bank to say “no” can be resolved in some way. That’s incredible and how it should be.
People are finally getting it.
– Merchant Processing Resource
https://debanked.com
MPR.mobi on your iPhone, Android, or iPad
¹ It took 5 years but Forbes has Finally deleted the March 13, 2008 article that haunted the merchant cash advance industry forever. In Look Who’s Making Coin off the Credit Crisis, Maureen Farrell referred to merchant cash advance companies as vampires that were feasting on small businesses and singled out some of the biggest names in the business at the time. It was Global Swift Funding* (GSF), one of the major funders cited by Farrell that exposed this assertion to be blatantly false. Not too long after the article was published, GSF closed their doors and filed for bankruptcy. It would seem that small businesses actually feasted on them by defaulting in record numbers. Back in April of this year, Forbes essentially rebuked that article when Cheryl Conner revisited the industry to note how much good it was doing in ‘Money, Money’ — How Alternative Lending Could Increase Your Company’s Revenue in 2013
*Disclosure: Raharney Capital, LLC the owner of this website currently owns the former domain of Global Swift Funding (GlobalSwiftFunding.com) though the companies did not have and do not have any ties to each other.
² IOU Central is a subsidiary of IOU Financial Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations as of August 22, 2013 are available at: http://cnsxmarkets.com/Storage/1563/144040_MDA_%282Q2013%29_-_FINAL.pdf
Funder Says Farewell to Car Dealerships
August 26, 2013Merchant Cash and Capital announced today that they will no longer be funding car dealerships. See screenshot of their announcement below:
Over the last 18-24 months, MCC and many other funders have greatly expanded their lists of accepted business types. It will be interesting to see if any other funders follow suit in re-restricting certain industries.
Gas stations, high-ticket furniture stores, and online businesses come to mind…
Split Funding is Here to Stay
August 21, 2013
I’ll say it for the hundredth¹ time, the advantage of split-funding is the ability to collect payments back from a small business that has traditionally had average, weak, or poor cash flow. Let’s put that into perspective. There is a distinct difference between a working business with poor cash flow and a failing business. A failing business is typically not a candidate for merchant cash advance or similar loan alternatives.
Poor cash flow could be the result of paying cash up front for inventory that will take a while to turn over. A hardware store with a healthy 50% profit margin may be able to turn $10,000 worth of inventory into $15,000 in revenue over the course of the next 90 days. The only problem is that the full $10,000 must be paid in full to the supplier on delivery.
Enter the merchant cash advance provider of old that discovers the hardware store has had a fair share of bounced checks in the past, mainly because of the timing of payments going in and out. Cash on hand is tight, the credit score is average, but the profit margin is there. Most lenders would take a pass on financing a transaction that carries legitimate risk such as this one does, that is until the ability to split-fund a payment stream became possible.
Advocates of the ACH method tout that it’s just so much easier to set up a daily debit and scratch their heads and wonder, “man, why didn’t we think of just doing ACH in the first place?”
The thing is, people did think of it and they concluded that for a large share of the merchants out there that needed capital, it didn’t make financial sense to try and debit out payments every day with the hope that there would always be cash available to cover them. Banks have had a hard enough time collecting just one payment a month, so what makes 22 payments in a month so much more likely to work?
I’m not inferring that there is something wrong with the daily ACH system that has taken the alternative business lending industry by storm. There’s plenty of situations for which that may be the best solution, especially for businesses that take little or no credit card payments. My point is that the split-funding method isn’t going to shrivel up and die. It’s here to stay. So long as businesses have electronic payment streams, they will be able to leverage them to obtain working capital.
When it comes to splitting card payments however, it’s important for a business to have faith in the payment processor. Reputation, compatibility with payment technology, and the assurance that the business will be able to conduct sales just as it always has are important. If you’re a funder, ISO, or account rep, it’s your responsibility to make sure that those three factors are addressed. A lot of processors are willing to split payments but they haven’t all made a name for themselves in the industry. Integrity Payment Systems (IPS) comes to mind as one that almost everyone works with and I’ve been in touch with Matt Pohl, the Director of Merchant Acquisition of IPS for some time. He’s been nice enough to share a little bit about what makes a split partner special, and what has made them particularly stand out in the merchant cash advance industry.
Clearly, the role of the credit card processor has diminished over the last couple years when it comes to merchant funding. ACH/Lockbox models have become more prevalent which created a sales mindset that switching a merchant account was more of a hindrance than a necessity. Some argue the decline in profit margin on residuals, due to price compression, made it no longer worth the time and effort to make an aggressive pitch to switch the merchants processing. ISOs also argue that too often merchants have reservations to switch processors because of previous bad experiences, cancellation fees, or because they simply know its not necessary in order to be funded. This is where it’s important to have the RIGHT split partner, not just any split partner
What makes Integrity Payment Systems a “special” split partner is the fact we control the settlement of the merchants funds, in house. IPS is partnered with First Savings Bank (FSB), which allows us a unique way of moving money. Because of our state-of-the-art settlement system and direct access to FSB’s Federal Reserve window, we eliminate the necessity of having layers of financial institutions behind the scenes that merchants funds typically filter through. This is a HUGE benefit to cash advance companies for several reasons. First, we implement the fixed split % when we receive the request, in real time. This allows the deal to be funded quicker. Secondly, since we handle the settlement process we have access to the raw authorization data which allows us to provide comprehensive reporting on a daily basis from the previous days activity. But also we can do true next day deposits, including Friday, Saturday, and Sunday funds available for the merchant on Monday morning. This is especially valuable when selling to restaurants/bars, or any other industry with a lot of weekend volume. Lastly, IPS makes outbound calls to merchants, on behalf of the sales agent and cash company, to download and train the merchant on their terminal. A confirmation email is sent to the agent which includes any batch activity so the deal can fund.
As an added example of this, on the last week of every month, the merchant boarding and sales support team fully understands that our MCA partners have monthly funding goals they need to reach. The IPS team goes above and beyond to ensure merchants get setup properly in time so those accounts can be funded before the month is over. We have a motto at IPS that the sales force are our #1 customers, and nowhere is that more apparent than by the way we take over all the heavy lifting once the agent gets the signatures on our contract. We firmly believe that by helping the agent by taking over the boarding process, that this will allow them to do what they do best, sell more deals!! A lot of competitors expect the agent to be involved in the boarding process, and that’s valuable time that takes them away from selling.
IPS has opened their doors to every MCA company that wishes to have an exceptional split funding partner/processor. We have all the necessary tools to provide this service the right way, and we want the opportunity to earn the business of every working capital provider out there. You don’t have to listen to a sales pitch from me, because I strongly believe that our reputation in the cash advance space speaks for itself. We would love the opportunity to talk to any MCA provider about a few additional services we offer utilizing our settlement system that will allow ISOs to fund more deals.
– Matt Pohl
(847) 720-1129
Integrity Payment Systems
One thing I can personally attest to about Integrity is their human factor. You can actually meet some of their team and see inside their office in the fun youtube video below:
Getting deals done
Ultimately, the financing business is about getting deals done and there are countless small businesses that just won’t ever be a candidate for ACH repayment. Heck, for many years the merchant cash advance industry wasn’t even a financing industry of its own, but rather it was one of many acquisition tools for merchant account reps. (See: Before it Was Mainstream). Technically it still is. You don’t want to sign up a merchant for processing and then have to move the account because the processor doesn’t split or because there is no dedicated customer service. I’ve been in that situation before personally and it’s a nightmare.
There’s a reason this website which is dedicated mainly to merchant cash advance is called the Merchant Processing Resource. You can’t know everything about cash advance without knowing about merchant processing. Get acquainted!
If you’d like to read the lighter side of Merchant Cash Advance History, you just might want to check out MCA History in Honor of Thanksgiving. 😉
¹ I said it for the 99th time on the Electronic Transactions Association’s Blog in Preserving the Marriage Between Merchant Cash Advance and Payment Processing
