merchant loans
Funding Restaurants is Risky Business
April 22, 2013
Perhaps as a fitting follow up to our recent post on Merchant Cash Advance Default Rates, an article in the Dispatch reveals that of all the businesses getting SBA loans, restaurant franchises are the worst performers. WHAT?! You read that right, but many of us have been saying this all along. Retail and restaurants are inherently high risk and that’s partially why they’ve been the bread and butter of the Merchant Cash Advance industry for so long. A friend of mine works in the commercial lending department of a major bank and he’s told me bluntly many times that their POLICY when it comes to restaurant loan applications is to decline 100% of the time. They don’t care if they have 800 credit, 40 years in business and 50 locations, the default rate is just too damn high and not worth the risk. Now the bank doesn’t come out and market this publicly and that’s why I haven’t identified my friend or the name of the bank, but when you see the numbers, it makes sense.
The SBA states that 20% of their guaranteed loans default
- Of the loans that defaulted, more than 50% of them defaulted before they were 20% paid in
- Of the loans that defaulted, more than 33% of them defaulted before they were 10% paid in
- Of the loans that defaulted, more than 7% of them defaulted before making a single payment towards the principle
The Dispatch points out that the SBA guarantees higher risk loans, as if that somehow justifies these statistics. The maximum allowable interest rate on a 7(a) loan with a maturity under 7 years is prime + 2.25%. Right now prime is 3.25%. Think about this… the interest rate is 5.5% and the default rate is 20%. Most businesses default without hardly paying anything. The taxpayers eat the billion dollar losses that result and Main Street America goes on believing that an interest rate below 6% is reasonable.
In the private sector, there is no government body sweeping billions of dollars in losses under the rug. Alternative lenders like Merchant Cash Advance providers are on their own to price deals efficiently and rationally. As you might guess, that price is usually MUCH higher than 5.5%. Many funders charging in excess of 40% barely break even at the end of the year, and some go out of business. Think about it… many businesses they support don’t even qualify for an SBA loan and the default rate on those is 20%. To operate in such a risky market, many try to hedge those risks by setting daily payments as opposed to monthly, and setting the loan term to 1 year or less. Even then, economic swings and competition have a way of making sustainability difficult.
On another note, here we have the SBA stating that 20% of their loans default, many before making even a dent in the principle and we have some alternative business lenders targeting an even riskier market that is claiming default rates of 2-5%. Something doesn’t add up here. Just saying…
Merchant Cash Network Hosts MCA Info Session
April 20, 2013I recently had the opportunity to sit in on an informational session for small business owners hosted by New York City based ISO, Merchant Cash Network (MCN). On Wednesday April 10th, small businesses packed into a room at 1375 Broadway to learn about alternative financing with a focus on Merchant Cash Advance. MCN’s vast knowledge on the subject was obvious and I definitely believe these grass roots sessions are an excellent way to both educate the public and to bring businesses together to network. Great work guys!
Merchant Cash Advance Default Rates
April 14, 2013
Here’s a question that every investor, lender, and underwriter asks at some point, “What is the default rate on a Merchant Cash Advance?” I personally don’t like when Merchant Cash Advance is overgeneralized since every funder offers their own variation of it, has a different tolerance for risk, and calculates under-performing or non-performing accounts in a unique way. Alas, I am not trying to avoid the question but want to make it clear that there is no one-size-fits-all financing model, nor a standard for defaults. I will quote publicly available information though…
On Deck Capital
10/9/12 – States their default rate was in the low single digits, but it was double that amount during the recession. Source: Upstart Business Journal
3/27/13 – States their default rate is around 5%. Source: Forbes
Capital Access Network
10/1/12 – Default rate stated to be in low single digits by their CEO, who adds that $275 million in accounts have underperformed but not all of those have been written off. Source: Digital Transactions
2/14/13 – Claims their loss rate (at least for a selection of their portfolio) was 3.2%. Source: Gigaom
Kabbage
11/13/12 – CEO claimed their default rates were below 2%. Source: USA Today
IOU Central
9/30/12 – Public financial statements reveal that more than 8% of their loan portfolio is impaired or past due. Source: IOU Financial Inc.
Outside opinion
10/1/12 – A senior manager at First Annapolis Consulting claimed that Merchant Cash Advance default rates averaged 12 to 13% in 2009, but that they are down to around 4 or 5% today. Source: Digital Transactions
SBA Community Express loans
12/15/2008 – An SBA program that guaranteed small business loans between $5,000 and $250,000 (this range sound familiar?). Default rate was 7% and the program was shut down on April 30, 2011. Source: LA Times
Borro
6/13/2013 – Borro CEO reports their bad debt in this video to be approximately 8-10%. They offer personal asset loans and their clients are primarily small business owners.
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Despite these figures, I still hear from account reps to this day who claim that up to 20% of their portfolios default. These defaults don’t necessarily all happen on the first advance or loan, as they may happen after additional rounds of capital. Perhaps more interesting is that these reps claim the funders don’t so much as bat an eye at these statistics.
So what’s the default rate of a Merchant Cash Advance? Well it depends on a lot of things…
Recent Merchant Cash Advance News
April 14, 2013
In case you missed some of the big headlines in this last week, below is a summary:
Forbes changed its tune on MCA after five years
It took only a handful of journalists to set the Merchant Cash Advance industry’s momentum back YEARS. One of those journalists was Maureen Farrell, a previous writer for Forbes. Her story on January 31, 2008, titled Look Who’s Making Coin Off The Credit Crisis mercilessly labeled Merchant Cash Advance providers as blood sucking vampires borne out of the Great Recession. Sensational headlines attract attention and Farrell did her job well. But for someone whose background is Art History, English, and Journalism, she may not have been in the best position to make a qualified assessment of such a unique method of alternative finance. It’s unfortunate then that Forbes ran the story since it no doubt impacted public opinion in a negative manner for years.
That’s why it was so refreshing to see ‘Money, Money’ — How Alternative Lending Could Increase Your Company’s Revenue in 2013. Published by Cheryl Conner, she wastes no time in pointing out Farrell’s prior coverage as one of personal opinion and skepticism. Merchant Cash and Capital’s CEO, Stephen Sheinbaum was instrumental in Conner’s fresh assessment of the industry.
Read the new article on Forbes…
Deals being stretched out over 15 to 24 months may not be a step in the right direction
At least that’s the take of RapidAdvance’s CEO Jeremy Brown. In his latest post on DailyFunder Brown argued permanent capital solutions do not fit working capital needs.
Read his post…
Major executive shake-up occurs at Capital Access Network
Capital Access Network, the parent company of AdvanceMe, CapTap, and NewLogic recently let go of several top executives. Before official announcements were made, word had already leaked out and was being discussed on DailyFunder.
Read the discussion…
Merchant Cash Group announced the winner of their NCAA March Madness contest
NCAA basketball took us for a wild ride this year, but Merchant Cash Group is still awarding all their participants with bobble heads. The first place winner got cold hard cash.
His name is….
On Deck Capital embraces startup culture
Video games and ping pong tables adorn On Deck’s new office. Is the culture changing in alternative lending?
Read the story…
The ETA Expo is fast approaching. Are you going? Plan meetups
ETA expo thread on DailyFunder…
Kabbage Closed on a $75 million credit line
Read the story…
Merchant Cash Group NCAA Contest Winners Announced
April 10, 2013
If you weren’t in this year’s NCAA bracket competition hosted by Merchant Cash Group, you missed out on a lot of fun!! But that’s okay, because well there’s always next year 🙂
From Heather at Merchant Cash Group:
“Merchant Cash Group had the privilege of hosting a NCAA March Madness Bracket Challenge offering a top cash prize of $500.00. We invited people from all over the financial industry to join our friendly competition where even the losers walk away with a cool prize. The Brackets were shaken up severely with the Cinderella story of Florida Gulf College and the early elimination of some of the top schools, uh hum Kansas St, New Mexico and UNLV to name a few. By April 8th we were down to only one person (Billy Crowe) who had Louisville winning it all and with that made a come behind win with a 15 point spread.
Now, while Billy is walking away with the Grand Prize all the other participants will be receiving a basketball bobble head trophy announcing to everyone that they in fact our bracket challenged. I would like to thank everyone who participated in the competition and I look forward to hosting more networking opportunities for our space. Below is the final standings and in the interest of saving ego’s please do not rag the losers to hard after all they are stuck with a bobble head.”
- Billy Crowe – PricewaterhouseCoopers Final Score: 111
- Heather Francis – Merchant Cash Group Final Score: 96
- Badger Morning – Merchant Cash Group Final Score: 80
- Sean Murray – Raharney Capital Final Score: 74
- Kara B – Merchant Cash Group Final Score: 73
- Jason Fullen – NVMS Final Score: 69
- Michael Bernier – SBS Capital Final Score: 59
- J. Mark Anderson – Business Funding USA Final Score: 50
- Scott Williams – Financial Advantage Group Final Score: 48
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My chances at bracket gold were dashed when New Mexico lost in the first round to Harvard. Harvard…
Thank you Heather for the fun and also I want to let everyone know that I will be spending some time at Merchant Cash Group’s booth during the ETA expo (#751) on behalf of MPR and DailyFunder. Merchant Cash Group is a great MCA company and I am honored to participate in their exhibit.
ETA Expo 2013 is Approaching
April 9, 2013
The ETA Expo 2013 in New Orleans is fast approaching. If you haven’t registered yet, you should probably go and do that over at http://www2.electran.org/am13/. This will personally be my first time to New Orleans and I am excited to meet and speak with a lot of you. Merchant Processing Resource and DailyFunder will be running a live blog to cover the happenings both big and small each day. So if you’ve got an iPhone and you haven’t downloaded the app yet, now is a good time to go and do that so that you can follow along.
David Rubin, a co-founder of DailyFunder will also be on site and we plan on having some fun giveaways.
So don’t forget plan your meet-ups, what to do, and who to see before you arrive. Talk about it on DailyFunder.
MCA Industry Continues Expansion
April 3, 2013
It’s said that one way to measure success or growth of an industry is to count how much capital is being raised. In that case, Kabbage and On Deck Capital have been on fire lately.
Early this morning, Kabbage announced they had secured a new $75 million line, after having just raised $30 million 6 months ago. The Forbes article announcement states that Kabbage has funded 60,000 deals to date and predicts to fund 100,000 deals in 2013 alone, a figure hard to comprehend considering that’s equivalent to the amount of transactions Capital Access Network has managed to do over the course of 15 years. I understand that Kabbage may do smaller, shorter term deals, but Capital Access Network has dominated MCA for a long time. Could Kabbage really do 100,000 deals this year? I’m unsure about this one.
Are traditional MCA funders missing out by letting Kabbage rule Ebay, Amazon, and Etsy unchecked? Is the Internet really that different than the brick and mortar market? Late last year, Amazon entered the financing market but for the purpose of strengthening their selling partners, so there are several reasons funders are tapping that market.
Paypal has been sitting on the sidelines and is perhaps considering jumping in the ring themselves. They are beta testing now with Ebay sellers.
Merchant Cash Advance is exploding in all directions. Did you hear that Yellowstone Capital funded $700,000 to a restaurant with the help of Strategic Funding Source? That’s a lot of money for a restaurant!
