Still Curious About a Merchant Cash Advance? The Last Article You Will Ever Need to Read
August 23, 2011
You’ve seen the advertisements, received calls with offers for it, researched it online, but you’re still not sure about Merchant Cash Advance(MCA). Every business needs capital but bank loans just aren’t available. Alternative funding sources are out there and they spend millions of dollars every year trying to reach you. The word “alternative” usually causes business owners to put their guard up. Basically, all non-bank loans warrant skepticisim until proven innocent. We here at the Merchant Cash Advance Resource understand your concerns and would like to answer your questions once and for all. We are not a funding source, reseller, or advertiser and thus maintain an independent perspective on the the MCA industry.
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- How Legitimate is it?
- Who is Really Using it?
- How Big is the Industry?
- How Widespread is it?
- What is the Application and Underwriting Process?
- Who are the Most Well Known Providers of it?
- Who is Regulating it?
- What Happens if you Default on it?
- How does it Compare to an SBA Loans?
How Legitimate is a Merchant Cash Advance?
The purchase of future credit card sales(Merchant Cash Advance or MCA) has been mainstream since 1998. At that time, Kennesaw, Georgia based funding source AdvanceMe, held the patent rights to a process known as split funding. The patent was later invalidated and AdvanceMe was immediately joined by industry veterans AmeriMerchant, First Funds (now Principis Capital), Merchant Cash and Capital, Business Financial Services, and Strategic Funding. All of these firms have been operating since before 2006. As of 2011, there are now nearly 40 documented direct providers of capital.
MCA funding providers are backed by big name hedge funds, a few at one point by well known investment bank, Goldman Sachs. MCAs have frequently popped up in the news and are openly endorsed by some of the largest payment networks in the world. See for yourself:
Feb. 11, 2011 – 10 Reasons to Start a Business This Year
Sept 1, 2009 – Enterpreneurs Turn to Alternative Finance
Apr. 2009 – Merchant Cash Advance Financing: The Good, The Bad, and The Ugly
Brochure and advertisement directly From First Data, the largest merchant acquirer in the world.
Advertisment and endorsement directly from Chase Paymentech
Program is offered by NAB, one of the nation’s largest credit card processors and the 2008 Detroit Regional winner of Ernst & Young Entrepreneur of the Year Award. 
Who is Really Using a Merchant Cash Advance?
Nearly every major national retail or restaurant franchise has used a Merchant Cash Advance. A small sample of the names include the following:
- Burger King
- Domino’s Pizza
- Hooters
- Subway
- Dunkin Donuts
- Taco Bell
- Denny’s
- Wendy’s
- Meineke Car Care
- Maaco
- Aamco Transmissions
- Curves Fitness
Data was obtained directly from Secretary of State UCC-1 filing records. More information on franchise funding can be read in one of our previous articles, “Who is Really Getting a $250,000 Merchant Cash Advance?“
How Big is the Industry?
Experts have predicted that more than $1 Billion in MCAs are being provided to businesses every year. We conducted independent research and was able to validate the size to be greater than at least $500 Million in 2010. Check out the study at, “Complete Merchant Cash Advance Statistics 2010“
How Widespread is Merchant Cash Advance?
The MCA product is not limited to the United States. This product is actively growing in:
- Canada
- United Kingdom
- Australia
- Hong Kong
- Singapore
For a list of international funding providers, take a peek at our article at, “Merchant Cash Advance – Canada, UK, and Beyond!“
What is the Application and Underwriting Process Like?
EASY! We recently released a guide for merchants that breaks the process down step by step. Download the guide here.
Who Are the Most Well Known Direct Providers of Merchant Cash Advance?
The biggest names are compiled in our Funding Directory. Many are BBB accredited and a few are Ernst & Young Entrepreneur of the Year award winners.
Who is Regulating the Merchant Cash Advance Industry?
Since MCAs are a purchase/sale of future credit/debit card receivables, lending laws do not apply. However, most firms belong to a self-regulating body known as the North American Merchant Advance Association. As stated on their website, NAMAA’s purpose is to promote competition and efficiency throughout the industry by:
- Providing education and professional development to its members
- Developing ethical standards and best practices guidelines for the industry
- Evaluating and providing education regarding the development and enforcement of intellectual property rights that affect the industry
- Evaluating and developing improvements to existing business methods and practices
- Developing industry relevant products and services
- Engaging in regulatory and legislative advocacy
What Happens if You Default on a Merchant Cash Advance?
In the case of a legitimate business failure, the merchant’s assets tend to be protected. There is significantly less at stake than a bank loan. We covered this topic once before in an article here, “What Happens When you Default on a Merchant Cash Advance?“
How Do Merchant Cash Advances Compare to SBA Loans?
The Small Business Administration protects banks from defaults for up to 90% of the losses. Despite this wildly generous guarantee, SBA Loans are considered to rank lower than a MCA. How is this is possible and what specific proof is there? Check out our analysis in, “SBA Loan vs. Merchant Cash Advance.“
Conclusion
The Merchant Cash Advance financial product has been in existence for more than a decade and is legitimate, mainstream, endorsed by reputable names, has been used by the most popular franchises in the U.S., is easy to obtain, offers asset protection that loans cannot, is self regulated, and is in many ways BETTER than a loan guaranteed by the SBA. A MCA may not be right for every business, but if it was just uncertainty that was holding you back, fear no more. This thing is for real…
-The Merchant Cash Advance Resource
http://www.merchantcashadvanceresource.com
webmaster@merchantprocessingresource.com
The Fork in the Merchant Cash Advance Road
August 23, 2011Originally Posted on April 25, 2011 at 10:48 PM
The Merchant Cash Advance (MCA) industry is growing, albeit slower than some may have you believe. But it’s moving in two opposing directions, a condition that’s making it tougher to describe the financial product itself in general terms. MCAs are becoming more expensive and a lot cheaper at the same time. HUH? You read that right.
Originally aimed at business owners with poor credit, the risk of default or delinquency was overcome by withholding a percentage of sales revenue directly. As the credit crisis and Great Recession took hold, it attracted businesses of all credit backgrounds and today it’s widely accepted as a lending alternative, rather than a solution to poor credit.
As MCAs pushed forward to compete for customers normally accustomed to bank credit lines, the cost was stiffly resisted. These businesses had a tough time envisioning their financing terms to be anything outside of some percentage over the Prime Rate. Since a MCA is supposed to be structured as a sale, there is no APR equivalent, no timeframe, no amortization, nor any real familiarities of a loan. As the past couple years have passed, the product is more publicly understood, but for it to actually catch on, the costs had to come down. Many funding providers now refer to such high credit, low cost accounts as premium, platinum, preferred, gold, etc.
While the margins earned on high credit accounts shrank, funding providers were dealing with another challenge simultaneously, defaults. Whether the business owner intentionally interfered with their credit card processing or the store went out of business altogether, bad debt in the MCA world was mounting…FAST!
No matter which company ran the figures or how secret these portfolio statistics were, every funding provider came to the same realization. The lower the credit score of the business owner, the greater the chance of a problem. Why this came as any surprise, is a surprise in that of itself. The Fair Isaac Corporation (FICO) will have you know that any individual with a score below 499 has an 87 percent chance of being delinquent on a credit payment within the next 2 years. Delinquent, is defined as a payment of 90 days or more past due.
But wait… if a MCA is not a loan, nor does it depend on the business owner to make payments, then how can there be a risk of delinquency? Intentional manipulation of the revenue flow back to the funding provider can be relatively easy to do. A business owner could use spare POS equipment to accept card payments for which the funding provider is not aware of and therefore prevent the collection of funds. That’s a method known as splitting, and serious consequences can result when discovered. (Read more on what happens in the case of default or deliquency on a MCA in a previous article)
But outside the scope of malice, there’s the traditional reason, the inability to make payments. If the suppliers and wholesales aren’t being paid, then the business isn’t going to have inventory on hand to sell. If the rent isn’t being paid, then there’s not going to be any location to generate these sales. Essentially, the funding provider has a mutual interest in the business being able to satisfy ALL of their obligations, not just the MCA itself.
If there is an 87% chance that suppliers, landlords, or other essential creditors will not be paid on time in the next 2 years, then there’s an excellent probability that the business will be unable to operate at the same level. With no collateral as protection, the MCA industry has adapted to the challenge by raising the cost. Business owners with poor credit can expect funds to be expensive and the terms to be more restrictive. Lower funding amounts, higher withholding percentages, and the sacrifice of any negotiation is the price the MCA industry has set to make funding to the maximum risk group possible. These programs, which are now often referred to as starter advances, don’t work for everyone so the pros and cons should be weighed prior to executing a contract.
Both the premium advances and starter advances have experienced extraordinary growth to the point where they have become niches of their own. There are now starter advance companies and premium advance companies. Funding providers like Strategic Funding Source have taken the product a step further and reportedly did a MCA for an exhibit at the Tropicana Hotel in Las Vegas for $4 Million. Contrast that with deals that are struck for as little as $750. And we can’t fail to mention that some have taken it back to the basics, a loan. ForwardLine in Woodland Hills, CA lends money to businesses which are then repaid in accordance with a predetermined, fixed pace through the card sales. They have reintroduced concepts like APR back to the finance world.
If we continue at the current pace, MCAs will become less expensive, more costly, a lot bigger, and markedly smaller. We’ve come to the fork in the road for what the Merchant Cash Advance industry seeks to brand itself as. Loan alternative? First choice? Backup plan? Is it for smaller businesses or larger ones? Should it go the way of lending or continue to remain a structured purchase of future card sales? Is industry cohesion really necessary or will increased decentralization lead to greater acceptance of this financial product a whole? Will there come a time when America’s big banks swallow the industry up, buy out the existing portfolios, and add this product to their financing arsenals?
These are tough questions. Merchant Cash Advance is evolving, growing, and no longer moving in one direction. While we contemplate our next step, one thing is for certain, there’s no turning back.
– AltFinanceDaily
www.merchantprocessingresource.com
CNN Distorts Facts with Merchant Processing Statements
August 23, 2011
CNN ran an article today (Business Owners Baffled By Financial Statements) that supposedly exposes the crafty credit card industry. While there can always be improvements in transparency, Catherine Clifford not only misses the mark, she speaks authoritatively on a topic that she does not understand. This is upsetting considering she consulted with experts in her research. (Tim Chen, CEO of Nerd Wallet and Phil Hinke, President of MerchantFeeSavers)
Here’s a few errors we’d like to point out:
“Mom and pop stores do not deal directly with credit card giants, such as Visa (V, Fortune 500) and Mastercard (MA, Fortune 500). Instead, they have to work with third-party processors — known as merchant account providers or acquirers.” – Those poor victim Mom and Pop stores! But it’s not just Mom and pop stores that don’t get to work directly with Visa or MasterCard, NO retailer deals with them. Visa and MasterCard operate payment networks, not card processors. It is the role of credit card processors and acquiring banks to deal with retailers, regardless of their size. Catherine, here’s a simple diagram that can better explain it.
“And to make matters worse, every credit card has a different fee structure. Every credit card brand — such as Standard MasterCard, Gold MasterCard, Premium MasterCard, World Elite MasterCard — has its own fee structure. That means there are at least 400 different combinations of charges.” – Only businesses using an Interchange Plus pricing model are billed according to the 400+ cost categories. For those using tiered systems, which is the VAST MAJORITY of mom and pop stores, there are only 3 or 4 rate categories. These categories are extremely easy to understand and compare against competitors using similar pricing. See more on this in our simple guide: Intechange Vs. 3 Tier.
“For example, the bottom of the statement shown above, says: “Effective June 2011, MasterCard is introducing a new fee.” What it doesn’t say is what the fee is for or how much it is.” – MasterCard is a payment network and the fee they charge is roughly 11 basis points. On $100 in sales, that translates to 11 cents, a near immaterial amount. The payment network fee is normally only applied to businesses using the Interchange Plus pricing model. While we believe the omission of the increase is either a mistake or a deliberate alteration to make news, considering how small the fee already is, any increase is likely to go unnoticed.
“We are business owners. We are working. We are taking care of the customers,” said Mike Craighill, who owns two restaurants called Soup and Such in Billings, Mont., with his wife, Antonia. “I don’t have time to spend looking over every single line of the credit card statement.” – We don’t want to slam Soup and Such but their response is particularly ignorant. Just because you can make soup, doesn’t mean you can run a restaurant. Running a business means taking time to go through the financial statements and paperwork. Whether you do it yourself or hire a bookkeeper is your choice, but to complain that you can’t be bothered by looking at a statement once a month is bad business sense. You can’t make the case for transparency while admitting you are too busy serving soup to care anyway.
“That’s why for some business owners, cash only may be the best way to go.” – The worst conclusion ever. To point out that some business owners have trouble understanding their monthly statements and therefore should only use cash speaks volumes about Ms. Clifford, who clearly didn’t care about making a cohesive argument. It’s a shame that millions of people will read the article loaded with errors with the clear endorsement of CNN.
I guess it’s all about spitting out content in the name of web traffic and advertising. It’s articles like this that spring anti-bank lobbying groups into action to fight against something they don’t understand. That’s how we ended up with debit card reform. The whole 21 cent debit cap fee that just went into effect? Hailed as a victory for retailers, it does nothing to change the price of a debit card transaction at the point of sale. Instead it limits how much of the revenue the acquiring bank can split with the issuing bank. Wait, huh?. Yeah… good work.
Next time Catherine, have the expert write the whole article for you or just don’t bother writing it at all.
– AltFinanceDaily
Merchant Cash Advance Outlook for 2011
January 2, 2011
Happy New Year! Over the past few weeks we spoke with many Merchant Cash Advance(MCA) industry professionals, read blogs, and scanned forums to find out what is predicted for 2011. Here is what we learned:
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The number of businesses facing tax liens will rise, making it increasingly difficult for them to obtain a traditional MCA. Their only resort may be “starter” or “decline” programs, which come with low capital and high costs.
Credit card processors(CCPs) will venture into funding their own clients. Over the past few years, CCPs were a necessary third party to a MCA transaction. The CCP would split the business’s batch to allow the MCA provider to collect on their purchased receivables. Their years as a third party have granted them incredible insight into the funding business. In the latter half of 2010, some CCPs tested the waters and funded businesses on their own. In 2011, we will begin to see the role of MCA provider and CCP gradually merge into solitary entities.
Resellers of MCA began to drift away from their dependence on funding providers in 2010. In 2011, there will be a surge in the number of resellers funding businesses on their own. The MCA industry will become largely decentralized and may give rise to new challenges.
Decentralization will lead to greater competition and create downward pressure on costs. Businesses stand to benefit by the likely trend of decreasing retrieval rates and factor rates.
Businesses hanging on by a thread are less likely to obtain funds in 2011. Bank loans were never meant as a means to stave off bankruptcy and neither is a MCA. Most detractors of the MCA industry were business owners on the verge of bankruptcy before obtaining capital. This is not a lifeline. Good businesses grow, bad businesses fail. That’s the way it has to work in order for the economy and capitalism to be functional.
The Federal Reserve’s 12 cent debit fee cap may negatively impact resellers that depend on merchant residuals.
The MCA industry will continue to use less expensive means of marketing. Expensive regional trade shows are becoming less popular and UCC hunting is on the rise.
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2011 is yet to be told. One thing is for sure, MCA providers are not unlike the businesses they fund. It’s a tumultuous economy and there is no guarantee that we’ll all still be standing in 2012. Remember those who have come before us (look at the bottom of this page). Much luck to all!
-AltFinanceDaily
