The Inefficient Merchant Lending Market Theory
March 5, 2013There are 4 major factors used to determine approvals in the merchant lending market:
• FICO Score / Credit Report history of owners
• Monthly Gross Revenue
• Time in Business
• Average Daily Bank Balance
Only 1 of these factors considers the applicant’s reputation, and that’s credit reports. Credit reports reveal past payment history with other creditors. They show lawsuits, unpaid taxes, and bankruptcies. Knowing whether an applicant pays on time or not is valuable to lenders but it fails to reveal an even more important metric, the business’s ability to generate future profits. If you’re shaking your head and saying “credit reports aren’t for that purpose,” I would respond by asking which of the 4 factors then is?
The amount of money deposited in someone’s bank account in the past reveals how much they took in, but it doesn’t indicate what will happen in the future. Similarly, a substantial daily ending bank balance may show responsibility to maintain a cash cushion, but it says nothing about how likely customers are to buy from that business in the future.
Could time in business then tell us? Is it safe to assume that a business that has been operational for a year, two years, or five years will be there for many more years to come? The local auto mechanic that’s been around for 5 years may only have lasted because no one else has gotten around to opening up a rival auto shop. Would it be safe to give the most hated mechanic in town a three year loan when their success is simply the result of being the only auto mechanic in the community? There may be somewhat of a correlation between time in business and customer satisfaction but it is by no means strong enough to predict future success.
In effect, the major metrics used to judge small businesses for financing today take no consideration of the number one thing that matters to a business for survival, customers. Without customers, the amount deposited historically means nothing. Without customers, a 700 FICO score cannot produce sales, profits, or money to repay a loan. Without customers, a 50 year old restaurant can’t continue to stay open just because it’s been there for 50 years. And without customers you better hope that $1 million in sales last year made you really rich, since without customers, you’re going to need to start a new business… preferably one WITH customers.
This doesn’t mean that these 4 factors are irrelevant, they’re not. But I believe these factors combined are but a tiny sliver of data to predict how well a business will do in the future and at the same time repay a loan. Relying on weak indicators forces lenders to charge higher rates since they must compensate for the risk of unknowns. It also decreases the length of time that lenders can trust their borrowers to hold their money for.
It is no surprise then that loan terms in the merchant lending industry only range from 3 to 12 months. None of the lenders are able to predict how their borrowers are going to do far into the future, so they bank on the odds that sales and deposits in the next few months will mimic sales and deposits in the last few months. That’s also the reason why there are a lot of test/starter/trial funding rounds that are short to witness how a merchant “does” before funding additional capital on a longer term. Underwriters are flying blind. They have to see how you do because they have no data to suggest what will happen.
The big firms do have SOME data by now, but they’re broad statistics that say a certain industry in a certain region is likely to perform X with a Y margin of error. Or FICO scores below 600 are likely to have a Z rate of default. Yet this data also ignores a business’s reputation and relationship with its customers. It applies a blanket assumption of performance over the period of 3 to 12 months. These statistics are highly important to a lender because they can use them to predict defaults and delinquencies as a whole and enable them to set rates that will cover all of it and then some.
The owner of an ISO once asked me, “Wouldn’t it be great if we got to the point where we were funding every business in America?” My answer was “No.” If 10, 20, or 30% of those businesses failed to repay or eventually went out of business (and they would if you funded everyone) and the lender STILL made money, then the ones in good standing had to of gotten charged way too much. It would also mean that there had to be a portion of performing loans that were actually distressing the borrower, causing the capital they obtained to work against them, rather than for them. The goal shouldn’t be to fund EVERYONE, but rather to fund the few that could truly benefit.
A great example of doing it wrong is Wonga, a UK based lender that accepted a 41% rate of bad debt in 2011 while still managing to reap £62.4 million in profit. If Wonga had a few hundred bucks, a few thousand bucks, or heck only a million, they’d probably be very careful about who they approved and why they approved them. But venture capital changes the game and not always in a positive way. Putting a few hundred million dollars in the hands of Wonga has caused them to become incredibly inefficient.
Why should they only fund 5,000 people through a highly comprehensive underwriting process when they can fund 30,000 people with a one-size fits all rate, ask no questions, and accept that they will burn a lot of their customers along the way? This is the question they must have asked themselves years ago. (You can read the founder’s interview HERE)
At some point when they were developing their business model they had to admit that they really didn’t care what the outcome would be for their borrowers, so long as the business made money. And so they created an algorithm that would statistically predict the rate of default based on weak indicators like demographics, how they answered a few questions, and credit score and the resulting delinquencies were just necessary casualties to make the system work. In essence, Wonga knows they will devastate a portion of their customers and accepts this. They’re like a restaurant that only sells sugar frosted donut cheese ice cream to obese people and accepts that 41% of their revenues will be lost due to their customers dying. Can a lender truly be helping a community or economy where it intentionally hurts a percentage of borrowers because it’s still profitable at the end of the day? Do their contests, soccer sponsorships, and positive messaging on social media make up for their disruption to the economy?
Wonga’s mission is to grab market share, a strategy to make holy their blanket performance statistics and the rate that has to be charged to make money. Every single individual in the country becomes a candidate for their loans even though the lender will never know anything about the individual borrowers, their long term prospects, or what they can afford. The math says it doesn’t matter because an acceptable amount of the loans will perform and applicants can either accept the high rate or get nothing.
How I portray Wonga is not what I think of the merchant lending market in the US but rather I believe they’re a good example of the trap that merchant lenders COULD fall into if they come into too much money. When I first began to hear lenders fresh off a capital raise saying they wanted to fund the sh*t out of small business and would do anything in their power to fund as many deals as possible, I fear they could end up disrupting communities more than they could help them.
You know that thing called the Internet?
So I’ve talked a lot about what lenders don’t know but nothing about what they can learn. There is an unbelievable amount of free data available on the web that can collectively be used as a strong indicator of future business performance. You know those all important customers I spoke about earlier? The ones that make a business a business? Well lucky for us, they seem to go online and offer feedback about their experiences. Yelp, Zagat, and Facebook come to mind.
How is a business REALLY doing? Reviews will tell you a lot so long as there are enough of them, and not just the star meter, but the actual written reviews. I assure you that it will help a lender if they see that the last 10 reviews say that the owner is a no good lying crook that stopped paying his employees and punched a customer just the other night. A business’s whole reputation can’t be assessed from paperwork and credit scores, but it can be by hearing from people in the local community. That community is online.
That brings me to another point here. If a small business isn’t online, then no faith should be put in that small business in 2013. I don’t know why there are still so many small businesses out there that don’t use e-mail, don’t have a website, and don’t participate on social networks. Unless their shtick is that they are an Amish style operation striving for authenticity, then not being online should be an indicator that they do not care much about their long-term success. I would go so far as to say that any business that does not have at least a website, business fan page on Facebook, twitter account, or a reasonable substitute should be automatically declined for financing. Yeah, I said it!
In 2013, ignoring the Internet is like opening a store with no sign, boarding up the windows, and surrounding the front door with barbed wire. Sure, the locals might know you’re there and be smart enough to come in the back door, and maybe they’re enough to keep your business stable but no one else will find you and the ones that do, will see that you have no interest in being something more. You don’t have to be on every social network but if you’re not on any, you’re doing something wrong. Ideally, you should be somewhat active with your customers online too. This doesn’t mean sending each person that dined at a restaurant a Thank-You e-mail, but it does mean addressing complaints if there are any, posting announcements so customers can see them, and taking steps to improve your reputation.
There are many, many trust and reputation signals online. At the most recent TED Conference, Rachel Botsman talked about collaborative consumption, trust, and reputation. She believes that trust is the most vital currency in our economy, not the money in your bank account, but trust. I highly recommend you watch it below. You should definitely take notice of what may eventually become a reality, an individual’s reputation scorecard, a report that aggregates reviews from everyone you’ve ever had an exchange with, and one that has the ability to evaluate the transactions which have the most meaning. My stellar e-bay seller record going back to 1999 might be on there (72 rave reviews baby!) but they won’t be as important if you’re looking to determine how credible I am as a business lending analyst. Still, in the grand scheme of reputation, they could have their place if someone wanted to gauge how trustworthy I am to deliver on something I agreed to.
Release the darn data
You want to know who is holding out on making the merchant lending industry and American economy a better place? The North American Merchant Advance Association (NAMAA) is. NAMAA possesses a database of every merchant that has defaulted or gone delinquent with a funding member in the last 4 years. There’s thousands of names in it. Not a member of NAMAA? You won’t get to know if a merchant has tried some funny stuff with another funder or gone out of business while having an advance.
But you want to know who this private bank of data hurts most? It hurts every business and wholesaler these merchants work with in the future. A month after a retail store fraudulently skips out on a $100,000 advance, that same retailer could apply for 60 day terms with a supplier and sign a 5 year lease for a new business location. Don’t that supplier and landlord deserve to know that their “awesome” new client has a reputation for committing theft and fraud as recent as 30 days ago? I think it’s our duty to let them know. NAMAA is withholding information that could prevent a lot of unreputable people from doing further harm in local economies. Make this data public and we’ll allow suppliers, landlords, and other lenders to make more informed decisions.
I’ve heard the argument that privacy can be a big selling point to borrowers. They don’t necessarily want outsiders to know that they borrowed money or to suffer the shame if they don’t pay it back. I can understand the benefits of privacy from a competitive standpoint for a borrower but it defies all logic and reason for a lender to keep a default under tight wraps. Public record of a default discourages borrowers from defaulting in the first place and is helpful to everyone that may interact with that borrower in some way in the future. How many merchants would reconsider signing on the dotted line for $50,000 if they knew a default meant the lender would personally message all of their fans on Facebook to tell them about it? Is this wrong? Is this any of the customers business? What if their customers were paying for services 12 weeks in advance? Would their customers have the same confidence that their service would be rendered knowing this new information? It is likely that some customers would view a default as a sign that the business cannot deliver on their promises and reconsider using them. By not letting them know, you are putting them all at risk of paying for services they might not get.
Even though everyone hates me, I project 300% growth!
Show an underwriter a chart of sales projections for the next two years and they’ll have no idea if it’s just wishful thinking. All the demographic research in the world won’t convince the bank that people will trust your product. Show an underwriter that 50, 100, or a thousand people are saying positive things about their experience with you online, and they might believe you’re on to something. Time in business, cash flow, profitability, and positive credit history show what someone did and what they have, but reputation and trust reveal what someone’s success in the future will be like.
It’s not just what they say about you
Your reputation goes beyond just what people are saying about you. At some point, you’ll talk back and what you say can clue lenders into who you are and what you are doing. I’ve caught a few business announcements on Facebook that went something like “To our loyal customers, we are making a last ditch effort to get a merchant cash advance to pay off our landlord by Friday and keep the business open. If it does not happen, then we want to thank you all for your support over the years as we will close for good.” Yeah, it’s interesting to see things like this after you just had a 15 minute conversation with that same person that claimed the funds would be used for a marketing campaign.
With hundreds of millions of dollars burning a hole in their pocket, a lender may be tempted to take the Wonga approach. I guarantee Wonga would say I wasted my time by examining a business owner’s social interactions. They’d say there were statistics and data that show they should fund that business anyway because the FICO score and sales volume are within their parameters, that defaults were acceptable and built into the numbers, and that funding as many businesses as fast as you can above a certain interest rate, is better than funding fewer businesses with more appropriate terms.
This is the premise of my inefficient merchant lending hypothesis for lenders that get real sloppy when they have too much money. Would you rather be a lender that charges more, funds more, and knows less about your borrowers or would you rather charge less, fund more intelligently, and know more about who you’re funding? The first road accepts that you will outright devastate a percentage of your customers, disrupt local economies, and leave a bad taste in the mouth of a handful of people. It might be profitable, but could you really claim to be a helper of small business?
When you fund EVERYONE, businesses with bad reputations can knock out competitors with good reputations, the cost of debt can harm more than it helps, or lenders can get skinned alive by defaults they never saw coming. We need to be aware that there are consequences to backing a business with a bad reputation because it can allow them to squeeze out the guys that would’ve actually had the most positive impact on a community. The counter argument may be the theory by the philosopher Adam Smith, a gentleman famous for promoting economic principles such that the pursuit of self-interest promotes the good of society. By this standard, if it’s good for the lender, then ultimately it must be good for the economy. However, allowing yourself to devastate a percentage of your customers isn’t good for the lender’s reputation even if it’s profitable. In a sense, pursuing immediate profit doesn’t mean pursuing ones self-interest. It may be months or years before enough unsatisfied borrowers begin to affect your reputation as a whole. Eventually, public opinion will sway. It’s happening to Wonga right now. If a lender’s business practices today could force them out of business in 5 years, then they are not pursuing their self-interest.
Real predictions, not just hoping tomorrow’s financial standing will be the same as it was yesterday
I look forward to the day when a merchant lender announces a 3, 5, or 7 year program. Their underwriting analysis would have to be incredibly well thought out, but that’s not a bad thing. Borrowers shouldn’t be forced to choose between an 8 month loan and a 9 month loan because so few lenders are willing to make real long-term projections. A business might make good use of short term financing to pay for an aggressive marketing campaign, but the likelihood that they could “open a 2nd store” and pay back all of the money with interest in 4 months isn’t very good.
My advice to the merchant lenders that are flexing their hundred million dollar muscles right now? Don’t carpet bomb the entire country with loans and hope that a one-size fits all rate and term will have a positive impact on the economy. It won’t. Writing off a portion of your customers today as collateral damage will hurt your reputation in the long run. Some businesses shouldn’t be getting funded even if they have money in the bank and a history of revenue. Others can’t sustain such short term repayments. These things should matter not just in the context of how much it will impact profits, but how much it will impact communities.
Incorporating factors like trust and reputation don’t have to slow the application process down. There are technologies to help aggregate, sort, and make sense of these signals online. Automation and speed are good but the day that lenders stop caring about who they’re funding and why they’re funding them is the day that lending becomes inefficient. When it becomes purely a numbers game, we’ll be in bubble territory. Can you think of any other industries where lenders stopped considering whether or not the loans were good for their borrowers and played the numbers? I’m sure you can 😉
Lend efficiently, be a good citizen, and don’t be afraid to place a value on what customers are saying about your applicants.
– Merchant Processing Resource
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Is Google Your Only Web Strategy?
December 31, 2012Every business wants to be found in search. To most, being found means top placement in Google’s search results for keywords or phrases that are most likely to convert into a lead, sale, or customer. That begs the question… how does one get that top placement?
While many are now accusing Google of monopolizing or manipulating the search results to promote pages and products that earn them revenue, they are still unique in the sense that one simply cannot buy top placement in organic rankings. The Google search system was originally designed to rank pages based on both how many other pages linked to a page and how important those linking pages were. It was a relational system called PageRank that theoretically gave little guys a chance of being ranked alongside or even ahead of major corporations.
When it came to being talked about or linked to from other sites (these incoming links are called backlinks), mega corporations with large sums of money had a tremendous advantage. Media outlets seemed to always be linking to them naturally and they could buy linking ads on websites that didn’t. They could even buy backlinks on irrelevant pages just to up the ante. In 2011, Overstock.com was penalized by Google after one such linking scheme was discovered. Overstock was offering discounts to students and faculty that placed a link to their website on a school web page ending with .edu. It was believed that .edu top level domains (TLDs) carried far more weight than .com, .net, and .org. Overstock tried to capitalize on that.
Where a company ranks in the result listings can mean the difference between success and failure. For the mega corporations, millions of dollars in revenue can be gained by being listed 1st as opposed to 4th. The reality is that searchers tend to click on top results more often, ultimately leading to more sales for the companies that rank well.
According to a study conducted by Slingshot SEO, the top search result is clicked 18.2% of the time, whereas the last result (#10 on the page) is selected 1% of the time. These statistics make a few things clear. If you’re not on the first page, you might as well be in outer space. Additionally, a ranking on the first page must be for a search term or phrase that is frequently searched. Sure, we’re happy to be listed 4th for the search phrase “greatest merchant cash advance company in the world,” since it links to our free directory of verified MCA providers, but since no one is using that search phrase, it really doesn’t matter.
A hypothetical business does research and determines that 100 people per month are entering this phrase into the Google search bar: “I want a merchant cash advance this minute.” It looks promising because it shows that the end user is in buying mode. One could make the case that they are more likely to apply for business financing than a user searching for “the history of merchant cash advance.” 100 searches for the initial phrase might seem like an opportunity, but you have to make an effort to achieve a listing for that keyword, at least that’s what Search Engine Optimization (SEO) gurus will tell you.
All Hail the King
Since Google is the omnipotent dictator that determines where every website falls, there is nothing that can 100% guarantee a website will be visible for the terms and phrases a webmaster wants. There is no shortage of tips, methods, and tricks to boost the odds but all of those things require time, money, or both. Neither will get the webmaster far unless the Search Engine Optimizer (SEOer) knows how to modify a website, analyze search phrases, and implement a strategy to increase rankings. If the SEOer isn’t tech savvy, stay away.
The SEOer’s strategy will likely fall into one of two categories, white hat or black hat, but it’s important to note that wearing any kind of hat is technically a violation of Google’s Terms of Use. It’s easy to label an SEOer that places thousands of irrelevant comments with a backlink on blogs all over the Internet as a black hatter. But contrast that technique with a white hatter that does nothing more than write interesting articles and get them published on other websites with a backlink.
The latter may seem innocuous, but both attempt to manipulate Google’s algorithm and can lead to serious ranking devaluation penalties. A penalty can be crippling for a business that depends on acquiring leads or customers online. Worse yet, the webmaster is not tried before a jury of his/her peers before being sentenced to page infinity for all search terms. This is the downside of the playing field Google creates. John Doe business owner can be listed alongside multi-million dollar corporations and can enjoy that visibility to grow into a million dollar business themselves. But if it is Google that brought him into this world, it is Google that can take him out.
In late April, 2012 Google announced they were cracking down on “blog networks.” This algorithm update became known as Google Penguin and hit the web like a hammer. 3.1% of all english search queries were affected. Penalized webmasters that paid to have self-written articles published on other websites to get the link juice were left wondering how the practice could be a violation. Analogies were used to explain that paying to promote oneself is standard business practice. They likened article marketing to the basic trade of journalism. They argued it was their constitutional right to promote articles without fearing the total loss of business or retribution from Google.
Google’s position though is that it is perfectly okay to link to a friend’s website or to pay to have articles placed elsewhere. They respect that those decisions are not theirs to judge in respect to the global Internet. However, if the intent (or perceived intent!) of these practices is to achieve higher ranking in Google’s search results, then they reserve the right to protect the integrity of their ranking system accordingly. Essentially, anyone can do what they want, but it might affect how things are scored within their private system. So if you don’t care about your valuation in Google, you can use all the linking schemes in the world if you so choose. The problem is that most people do care about their score in Google and many people view Google as the global Internet. Google can argue that they are simply policing their own private system but to millions of web users around the world, they are viewed as policing the Internet.
The Revolution
It’s not their fault. Google’s system was so good and their interface so simple, that millions of people started using it and never went back. They became the Internet. Search engines existed previously but had many flaws. Back then, millions of websites that provided answers to questions or sold solutions for problems went undiscovered to the vast majority of humanity. Google found them, ranked them, and then went on to check them frequently to make sure users were still likely to find what they wanted.
They made the world a better place until the laws of their kingdom began to contradict common sense. For example, it would seem practical for a video game company to buy a banner ad on a video game enthusiast web forum. They could benefit from the targeted traffic and hopefully sell some video games. But at the same time, Google might view this banner link as an attempt to manipulate their algorithm.
To resolve this dilemma, Google created a tagging system to allow their search crawlers to identify which links were paid for and then direct their algorithm to make sure the buyers did not benefit in search from them. This directive was controversial because it forced webmasters that cared about their rankings to worry about the nature of their outbound links. Could a website selling banner ads hurt both the buyer and the seller at the same time? They sure could. If buying and selling backlinks is forbidden, then both parties have something to worry about. Today, it is important to include the rel=”nofollow” attribute in html coded links that are paid for.
Since the majority of web users use Google in some way, the challenge and effort to achieve better placement has become a billion dollar industry. Prestigious advertising firms claim they can improve search placement using white hat guidelines Google itself created. The fact remains that there is no way to be safe, no matter how prestigious, knowledgeable, expensive, or innocuous the SEOer is. Having a page on a website that discusses a topic that another page on the same website already talks about can be grounds for a penalty. Interlinking your pages too much can be grounds for a penalty, discussing too many broad topics can be grounds for a penalty. Writing with imperfect english can be grounds for a penalty. Mentioning your product or service too many times in an article or throughout your website can be grounds for a penalty. Not using enough visual aids such as images or videos can be grounds for a penalty. Adding new content to the website too frequently can be grounds for a penalty.
Everybody’s Doing it
Smart webmasters approach the web like their health. Do everything in moderation. It seems like every year there is a study that proves a correlation between a daily household food item with a certain untimely death. We’ve all heard something like this before: “The study determined that people that eat less than 2 carrots a day are more likely to die before the age of 70 than people that eat 2 or more carrots per day.” It’s the kind of fear mongering that causes someone to worry obsessively about meeting the 2 carrot daily minimum only to get hit by a bus as they cross the street three decades before they turn 70. Webmasters can spend their days worried about how Google will view them and ultimately never be found by their potential customers or they can do what everyone else does and work on getting backlinks and add content to their websites.
Is a compliant website that is never found by customers better than a website that has a good run, makes a lot of money, but takes the risk of getting penalized in the end? Some believe it is better to have loved and lost than to have never loved at all. Afterall, an online business that has no web visitors is not really a business is it?
White hatters, the SEOers that wrongly believe they are immune from repercussions argue that their strategies take far longer to create results because they are in it for the long haul. Coincidentally, these long-haul strategies tend to have a high monthly price, do not guarantee results, and cannot predict what changes Google will make in the future. For example, if an SEOer says their slow and steady method will take 6-12 months, the webmaster should understand that the ranking algorithm could change in 5 months. All the work performed could be rendered obsolete in the blink of an eye or worse, devalue the ranking further from where it was originally.
In the quest for a quick fix or even as part of a long-term strategy, SEOers can’t help but notice that websites maintained by news media seem immune to all the rules. They republish countless amounts of duplicate news reports and they buy and sell exposure like its going out of style. In a way, they are a multiplied version of everything Google says not to do. But while they might get tons of traffic from search engines, they are not entirely dependent on them. Big news media has incredible brand name recognition. An individual seeking information about the Fiscal Cliff may simply type “CNN.com” in the browser address bar and bypass Google altogether.
Companies like Reuters, The Wall Street Journal, Fox, and CNN, etc. are highly authoritative and could be categorized as the holy grail of backlinks. If one of the major ranking factors is the importance of the website the link is on, then there is nothing more important than being mentioned by national mainstream news media. The media outlets know the perceived value of their links and are hungry to find new streams of revenue. Thus, an opportunity presented itself to them just as printed newspapers began going the way of the dinosaur. And so they began to peddle link juice.
The age of buying links is not dead and it is now much more difficult for Google to punish the parties involved. Webmasters can pay public relations firms to get a “company press release” published on big news media sites and get the backlink of course. This tactic has been around for years but it has become one of the last great bastions for white hat SEO. Others would argue that social media is the next frontier but for SEOers grinding it out in the trenches, traditional backlinks seem to work better above all else.
Many public relations firms have been warned by Google not to promote the backlinking aspect of their service, but all of them offer some kind of SEO package to target webmasters that are interested in using their service for the purpose of link juice. Searchengineland.com ran a great article that exposed what the press release as SEO tactic revolution has done to the news. (http://searchengineland.com/how-prweb-helps-distribute-crap-into-google-news-sites-140597)
There is now a surge in boring, irrelevant, and oftentimes non-sensical company announcements on big media sites across the Internet. It is a popular SEO method in many fields, making it difficult to find actual industry news amongst the clutter of backlink driven stories.
But if it works, then why stop? That of course implies that it works in the first place. Several days ago, Matt Cutts, the director of Webspam at Google informed inquisitive webmasters that links in these press release articles DON’T COUNT. Helpful SEOers explained to the original poster that most links in press releases have the no-follow attribute added to the links to make sure that they don’t pass juice. Upon our own examination however, we couldn’t find any news media or public relations firm that implements no-follow. It would probably hurt their bottom line if the junk releases they were peddling suddenly didn’t count for anything.
The debate rages on about whether or not the director of Webspam is to be trusted. Is the ranking algorithm as powerful as Google claims it is? Or are they spreading fear and misinformation to make up for their shortcomings? There is a lot of interesting feedback to consider in the comments section of seroundtable’s short article regarding press releases.
In the past, many webmasters have used obvious black hat techniques for favorable placement and gotten burned in the end. Many innocent websites have been caught in the crossfire. Success on the Internet is believed by many to be achieved only by being visible on Google.
The War
Individuals that have never managed a business website in their life have little idea how Google works. They know it will provide them with the answers they’re looking for and rank them in order from best to worst. To everyday users it is nothing short of magic. To an SEOer, being #1 for a search term may mean weeks, months, or years of trial, error, and patience. It requires time, money, or both. It is a tireless quest to become #1 or to die trying. It is the difference between getting 18.2% of visitors for a keyword searched 5,000,000 times a month or 1% of visitors for a keyword searched 100 times a month. It is a battle against not only Google, but against competitors in the same field that are using the same tricks to move up. It is a system that gives little guys a chance to be ranked alongside major corporations. It is way to be found in the sea of a trillion websites. But it is also a dictatorship. Google can sneak into your house in the middle of the night and banish you to page 50 with the accusation that you were buying backlinks. Google can lock the front door of your virtual store to prevent shoppers from getting in. Google can label non-native English speakers as spammmers and silence those that won’t stop writing about the same thing over and over again. This is the challenge with a single company being tasked with policing the entire Internet.
The Perks
There are alternatives out there like Bing and Yahoo, but the problem is that when people go to those sites, they tend to type Bing or Yahoo into Google just to get there. Such is the habit these days for getting anywhere on the web. In 2008, blogger Marshall Kirkpatrick wrote about this phenomenon. He argued that mainstream users of the Internet do not even know how to navigate it. While tons of responders to the article seem to agree, there are plenty of folks that make a compelling case as to why using a search engine is superior to a browser’s address bar.
It isn’t easy typing ../../ perfectly if you’re a fast typer, which might explain why a significant portion of our visitors type this url into Google instead. They want to get to the right place the first time even if they type it in wrong. They might not even be exactly sure what our website is called or how to spell it. It’s not uncommon to see incorrect urls somehow end up in our traffic reports anyway.
- Merchant Processing Esource
- Merchant Processing Source
- Merchant Processing Resources
- Merchant Proccesing Resource (2 Cs or 1s)
- Merchant Processor Resource
The list of mistakes continues, but Google points them in the right direction anyway. If this didn’t happen, we might seriously consider rebranding the site with a much shorter domain name. Unfortunately, in mid-2010 when Merchant Processing Resource started, we didn’t give much thought to the difficulty in remembering a 7-syllable name, nor the likelihood of miskeying a single character in a 34 character address (www.merchantprocessingresource.com). This shove in the right direction is a benefit that an address bar can’t offer.
Not Evil?
The user oriented focus of Google arguably ended once and for all on May 19, 2010, the day they went public. While #6 on the list of Google’s official philosophy is that “You can make money without doing evil,” shareholders may have qualms with #1. It states, “Focus on the the user and all else will follow.” This motto doesn’t scream maximum profit. Besides, being public doesn’t allow Google to focus on the user, but instead tasks them with increasing the value of their stock. Of course they can’t earn a profit if they disregard the users altogether and so they are faced with the challenge of maximizing profit without alienating their users.
Adhering to their own philosophy is tricky, not to mention that many state and national governments believe that Google is manipulating the results to promote their own products. Products? one might ask; What possible products does Google have? Oh you mean you haven’t heard of Maps/Earth, Youtube, Zagat, Google Reviews, Google Plus, Gmail, Blogger, Picasa, Google Wallet, Translate, the Droid OS, driverless cars, the Chrome web browser, or the many other products they control?
Google isn’t content with just controlling search. They want to control the entire Internet experience. Companies like Facebook threaten that monopoly and as such Google has made social networking a top priority to counter them. Not evil?
The Google universe is exhausting. Webmasters must do more than just design great websites to continue enjoying the luxury of being found. Paid links must be marked as no-follow, backlinks on bad websites must be disavowed, private pages must be marked as no-index, similar or duplicate content must be avoided, URLs must be descriptive, title tags should be relevant, HTML should be used over Flash, and moved pages should be redirected if for no other reason than to retain the page value of the original URL.
Is There Life After Dea.err…Google?
As we draw near our conclusion, we argue that Google continues to play a large role in Internet Marketing, but advise that Google is not the Internet, no matter how much you’ve come to believe otherwise. There is LinkedIn, Facebook, Twitter, web forums, blogs, email newsletters, and a zillion other places to promote oneself and be found. Too many people fail to utilize the infinite other opportunities to market themselves online simply because they believe ranking in Google is the only way or because they’ve received a penalty and give up. “Getting ranked” has become an all consuming challenge that blinds webmasters from their true goal of attracting customers. People bought products and services online before Google came around. They might make things easier for the average user that believes search results are a product of magic, but in reality they are just one of many systems to find things. They are an imperfect ecosystem that has become tainted by their motivation for profit. And let’s not forget the millions of white hatters and black hatters that are driving the algorithm wild as they seek better placement for themselves or their clients.
Do we care about Google? Certainly, but only about half of our visitors originate from the search engine. People actually see us mentioned on LinkedIn, Facebook, and actual trade publications. And guess what? Those people visit us, bookmark us, and return. There may come a day when Google decides too many incoming links from Facebook is grounds for a penalty, causing outrage among webmasters, a move that might force many to give the social network up, and even disavow it officially. White hatters could end up having to eat their white hats down the road. The whole system of the Internet will no longer seem to make any sense. Maybe a reality check is okay. Perhaps too many hours and megabytes are wasted on trying to gain favor with Google. So much junk exists out there these days that isn’t even meant to be read or followed, but rather exists for the sole purpose of gaining link juice. If a poorly designed website in China links to a good website in the U.S., should the webmaster have to spend time tracking it down, identifying it, and disavowing it just to appease the king? Does this make any sense?
The next time you spend $300-$500 on a press release with carefully crafted link text, think about whether or not Google is really going to reward you with placement for a search term. Their director of Webspam says you’re not going to score any points, yet you may believe otherwise. Consider how else that money could be spent online outside the context of Google SEO. Are you looking to attract customers or simply gain favor with a king that MIGHT lead to customers? Imagine for a minute that Google, Bing, and Yahoo have banished you from being found forever. Would you close up shop or start to think outside the box?
White hatters that read this may be mumbling to themselves that they need not think this way because they have a surefire strategy that works, something along the lines of “Content is King.” This “Content” revolution involves publishing tons of articles to ones website to give the impression to Google that a website is constantly being updated with helpful information. An SEOer will tell you that Google “wants” this. In reality though, this has created a new phenomenon, the practice of webmasters spamming their own websites. The content may be informative, well written, and on-topic but if it’s being done to please Google instead of making sales or helping visitors, then it’s really nothing more than the black hat trick of the day. “Content is King,” that is until it’s not because 100 million websites are doing the same thing, leading to a vast pile of junk in cyberspace.
People forget that the word ‘marketing’ exists in Internet Marketing. They focus their time and effort on Internet Manipulation. They either have systems to make a quick buck or they slowly march onwards towards a promise that can’t be kept. As we approach 2013, it remains true that Google can’t be ignored, but the rest of the global Internet shouldn’t be either. There are billions of people out there that are looking for what you offer and you need to learn how to reach them. Coincidentally, there are 100 million articles on the web that claim they can teach this very trade. 99 million of them exist for the purpose of getting a backlink. That means the information is questionable at best. Take a marketing course, read a marketing book, or hire a marketing consultant. Go back to the basics if you must. Plan for the day where you won’t exist in search even though your business exists in real life. If the moment comes where Google replaces the search results with only paid advertisements or you get penalized because you told all of your friends to link to your website, you can shrug it off. If you want to be in Internet Marketing for the long haul, stop thinking about search. Google can’t be your only web strategy forever.
– Merchant Processing Resource
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Find tons of great Matt Cutts memes here
A Great Thread That Discusses Business Survival Without Google
Funding Down to a Science
December 21, 2012Account rep: Congratulations, you’ve been approved for $27,000!
Merchant: How did you come up with these figures?
Account rep: It was science. Science did this.
Funny? Maybe not, especially since an underwriting super algorithm may be on its way to the United States. In the days after we posted Made for Each other?, friends, acquaintances, and strangers have been telling us to keep an eye on Wonga’s potential acquisition of On Deck Capital. “It’s not just a european company’s gateway to the US. They’re going to change everything,” a few have said. Aside from their background of being a payday lender, having prestigious VC backing, and the resources to throw a quarter billion dollars at a main street lender in a takeover bid a lot of people didn’t see coming, apparently there is much more to be seen.
Just like MCA in years past, Wonga has worked hard to repel a negative image. Not easy stuff, especially considering they embrace their hefty costs wholeheartedly. Sure, it’s easy to calculate an APR equivalent of a very short term loan and spin whatever number you come up with as the symbol of something evil. If I let a stranger borrow $100 today with the stipulation that they pay me the whole thing back tomorrow plus 1 dollar extra to make it worth my while, would I be evil? That’s an APR of 365%. If I did the same thing with 100 strangers, what are the real odds that all 100 would actually pay me back? Somewhere along the line because of a borrower’s circumstances, bad decisions, or even malicious intent, I’m going to lose the entire $100 I lent out. Others might need more time to pay me back. If one person out of those hundred doesn’t pay back, I break even. If two people don’t pay back, I lose money. If one person doesn’t pay back and another can’t come up with the whole thing, I lose money. You can lend money at 365% APR and lose BIG.
So how do banks manage to charge 4, 7, and 10% APR? Is it just because they’re smarter? No. They don’t make money off loans at these rates either. In the US, interest rates are distorted by government guarantees. Politicians have decided that certain interest rates sound “fair,” then push big banks to lend money at these low unsustainable rates. But of course it doesn’t work and so government agencies sweeten the deal by reimbursing banks for up to 90% of the losses on the borrowers that default. Banks make money on the loan closing fees and other services they sell to the businesses. The loan is the doorbuster offer the bank puts in the storefront window. Once you come inside, they try to sell you on other things so that you don’t walk away with just the loan, otherwise they’re losing money.
So when you hear “banks aren’t lending,” don’t be so surprised. Lending money means giving it away to someone that might not pay it back. That’s a really tough business to be in, no matter how qualified the borrowers are or how good the underwriters are supposed to be.
But somewhere in between the opinions of the Merchant Processing Resource staff and government bureaucrats over what is fair, is a special recipe that determines once and for all what works best. It’s science. Wonga’s lending success is rooted in science and propelled by an advanced algorithm that can systematically calculate risk better than any bank in the world, or so they say.
One of Wonga’s major investors, Mark Wellport, is a knighted renowned immunologist and rheumatologist that has defended Wonga’s methods against regulation. He believes their data-based process and strong motivation to make their borrowers satisfied places them in an entirely different category than payday lenders.
Wonga takes a human-free approach, something no MCA provider in North America does regardless of how automated their process may seem. In the UK, their business loan application process takes only 12 minutes and the funds are wired 30 minutes later. That’s it. Their max loan is £10,000 but just think about how that compares to MCA in the US. How much time and overhead is being spent on printing documents, underwriters, conference room meetings to discuss deals, setting up the merchant interview, trying to reach the landlord, trying to get page 7 of a bank statement from 6 months ago and the signature page of the lease, etc. etc. Funders might have had the wrong approach all along.
Wonga’s founder, Errol Damelin believes in data. According to some quotes in The Guardian, Damelin believes interacting with the borrower actually impairs a lender’s judgement.
From the Guardian:
Asking for a loan from a financial institution had traditionally involved making a strong first impression – putting on a suit to see the bank manager – then rigorous questioning, checking your documents and references, before the institution made an evaluation of your trustworthiness. In a way, it was exactly the same as an interview, but instead of a job being at stake it was cash.Damelin found this system old-fashioned and flawed. “The idea of doing peer-to-peer lending is insane,” he says. “We are quite poor at judging other people and ourselves – you get to know that in your life, both with personal relationships and in business. You realise that we’re not as good as we think we are at that stuff, and that goes for almost everybody. I certainly thought I was much better at it.
The 42-year-old entrepreneur grew up in apartheid South Africa, and he believes the experience of living in that country in the 80s has had a significant impact on his outlook. He was active in student politics at the University of Cape Town and marched in civil disobedience protests. So, when it came to deciding who should be lent money, Damelin says he wanted to strip away some of the prejudice – decisions would be taken without a face-to-face meeting; you wouldn’t even speak to an adviser on the phone, because people subconsciously judge accents too. The final call on whether to hand out cash would be based on “the belief that data could be more predictive than emotion”.
According to Wired, Damelin and his team created a system to approve or decline applicants all on its own. They tested it on a site called SameDayCash by using Google Adwords and within ten minutes of their ad going live, their system had already approved its first customer. In its early forms, it wasn’t very profitable from a lending standpoint but it did allow them to collect a massive amount of data.
From Wired
its strategy over this period wasn’t just to disburse money — it was to accumulate facts. For every loan, good or bad, SameDayCash gathered data about the borrowers — and about their behaviour. Who were they? What was their online profile? Did they repay the money on time? The site was feeding an algorithm that would form the basis of Wonga, launched a year after the beta experiment that was SameDayCash.
MCA has utilized Adwords for lead generation for years with mixed success, but few have used it for the purpose of accumulating facts. This isn’t to say that the firms collecting information for the purpose of leads aren’t sitting on treasure troves of data, it’s just that none of it to date has led to 100% computerized underwriting. The MCA industry is quite possibly about to undergo a major shift in how they promote their product on Adwords as a result of Google’s ominous warning a couple weeks ago. New disclosure requirements may change the way consumers respond and apply, ultimately impacting the data collected.
So will european science work in the good ‘ol US of A? If Wonga acquires On Deck Capital, you can bet they’ll try to replicate their success. There is a gigantic market of really small businesses that aren’t getting funded, and even the ones that are, they’re waiting 3-7 days to deal with the paperwork, handle the phone calls, fax documents, complete a landlord verification, and in some cases, deal with a credit card processing equipment change. If On Deck Capital becomes a household name as Wonga is in the UK, a lot of smaller funders are going to get squeezed.
Wonga claims to have a net-promoter score above 90%, a customer satisfaction metric that beats most banks and even Apple Computer. It’s a company that seems to be winning on every front.
Critics will say that the American lending market is big enough for everyone, that the loans Wonga has done traditionally are really small and therefore not in the same league as MCA, or that their own company has something similar or better. We believe however, that if this deal goes through that it’s a bad idea to get comfortable. There are Wonga-like companies in the US already, data fortresses that will soon revolutionize how loans are issued and determine what makes a successful business. New York based Biz2Credit is one such example.
We’ve been right about a lot of things in the last couple years and wrong about some. But we believe it is inevitable that any lender ignoring the automation revolution on the horizon is not going to last very long. Go ahead, brush it aside and convince yourself that this whole Automation thing is just hype as BusinessWeek did in 1995 about the Internet. “Automation? Bah!”
As Damelin told Wired in June, 2011, “For me the epiphany was right there. People were online, looking for a solution to a problem.” Ask any funder using Adwords or pouring work into SEO and they’ll tell you the same thing. People are looking online for money. What happens after they fill out the form on the website is what makes the USA MCA/alternative lending industry different from Wonga.
But will a perfected european algorithm work in the US? Americans approach debt and money differently than the rest of the world and small businesses operate in a much more open manner. You never know, the european lab coat wearing scientists could come here and get their butts handed to them. Plenty of smart companies have jumped headfirst into MCA and left after disastrous results. Some veterans that have been in this business a long time will you tell that an impressive resumé, big investors, and a fancy algorithm will help you make it through the first six months. After that, you better know what the hell you’re doing, if you can continue to do it at all.
If in three years the average small business owner thinks Wonga is the last name of a guy that owns a chocolate factory, we promise to write a jingle that admits we were wrong about them. But On Deck Capital has been around the block and knows the business. They would allow Wonga to skip the learning curve and together could quite possibly nail lending down to a science.
Oompa Loompa do-ba-dee-doo, I’ve got another algorithm for you.
– Merchant Processing Resource
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There is great feedback to this article in a LinkedIn Group HERE
Forward?
November 8, 2012The election is over and now it seems we will be “Moving forward, not back.” The republicans that have already come to accept Romney’s defeat are sounding a lot like Sookie Stackhouse:
Onwards we go to help the little guy, a process many feel can’t happen until we end trickle-down economics. It’s the trickle part that doesn’t sound good. Money should flow freely gosh darn it, not trickle! We couldn’t agree more. Here’s a broad diagram of the economy at work:
It’s popular to hate Wall Street, but Wall Street provides small businesses with financing to expand, who in turn employ more people in the process. Wall Street is not just banks and Merchant Cash Advance companies. It is any party that has enough money to invest in others while being able to absorb potential losses. A private investor is Wall Street. Wealthy friends or family members are Wall Street.
Tax these parties more and there is less money to invest in small businesses which means fewer businesses will receive capital to expand and hire. Wall Street will make less money as a result of less money being invested and therefore tax revenue will decrease. With fewer businesses hiring, less people will be employed and therefore less people will be paying taxes. Taxing Wall Street more does not necessarily mean more net tax dollars.
This Darn Trickle
One can dislike the economic chain since the flow of money between parties may not happen perfectly or because it allows Wall Street to get richer. There is nothing wrong with the rich getting richer, so long as the middle class and poor get richer too. If small businesses use the money invested by Wall Street wisely, they too will eventually become Wall Street. The amount of new jobs created as a result of a small business’s success means more wage earners will have a shot at becoming small businesses. In economics, a wide divide between rich and poor can be positive, for it creates a ladder that anyone can climb with no cap.
Empower the Little Guy
There is a competing theory and that is to believe that the economic chain starts with middle class wage earners. One could argue to significantly lower taxes on the middle class and the poor and impose much higher taxes on the rich. By doing so, consumers would have more money to spend at small businesses, prompting those small businesses to draw up plans to expand. That expansion capital still needs to come from somewhere and less of it will be there if Wall Street has been further taxed. Perhaps a small business could save money for a few years and use their savings to self-finance their own expansion. Under this theory, everyone becomes part of a very broad middle class. The extremes disappear.
Whoops
When the extremes disappear, there will be few investors with the capability to make large investments or investments that are particularly risky. A small business owner could save up for several years and open a 2nd location without an investment, but could he open 200 nationwide? Not without Wall Street. How many jobs will be created by the opening of 1 store? How many would be created by the opening of 200?
Now calculate how much new tax revenue is generated in each scenario, as well as the number of people that move up from being poor and unemployed to middle class and employed.
When the rich aren’t getting richer, the other classes can’t really move up either. Everyone stays in a broad middle class and innovation and advancements decline. The consumer or small business owner with a potential $100 million innovative idea won’t be able to raise the capital to see it through. How can they when the rich have been prevented from becoming really rich? What if they had a $10 billion idea?
One could argue as a single class society, that a $100 million idea or $10 billion idea could be financed by the government. This is true. It is also textbook state socialism. A one class society is also the premise of Marxism, where everyone is getting their needs met through cooperative work.
Marxism ignores the realities of a global economy. Ultimately, Americans need to obtain resources from other nations, and stay ahead technologically so as not to be conquered by outside forces. A classless society is a stale society, with no economic movement, social movement, or technological advancements.
How will the Merchant Cash Advance Market be Affected?
Merchant Cash Advance companies typically invest in businesses with less than 50 employees. Under Obamacare, any business with less than 50 employees does NOT HAVE to provide health insurance. This program may not affect the business as a whole, but the law mandates that all individuals purchase health insurance for themselves if they don’t have coverage already. Small business owners in the MCA market may be incrementally stressed by having to purchase health insurance. Their employees will be further stressed by having to buy it as well. As a result, wages may need to go up to help workers pay for their own insurance and less money will be available to grow and hire.
The total public debt outstanding has exceeded $16 trillion. That debt has to be paid for somehow and it is more likely than ever that Wall Street is going to have to pay up. This will not stimulate growth and as such, the economy is not likely to pick up any time soon.
Traditional lenders are going to remain quiet while the alternative lenders are going to power through it. A business could save up for three years and open a 2nd location or it could open it today with a Merchant Cash Advance. In three years, the location they want may no longer be available and that individual looking for a job will have run out of unemployment benefits long ago.
A Merchant Cash Advance helps small businesses expand today, hire today, generate more tax revenue for the government today, and helps everyone move up the economic ladder. Baby steps are better than none at all. What starts with a 2nd location may lead to a dream of owning 200 locations nationwide. They’ll need a bigger fish than MCA to get there. Let’s make sure we don’t tax those fish to death.
What do you think Michael?
Forward!
– Merchant Processing Resource
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Traditional MCA Gets a Speed Makeover
October 24, 2012
“How about you fund me first and then you change my merchant account?”
Some account reps will testify that closing a traditional split-funding or lockbox deal can be a bumpy road. The pay-as-you-grow system sounds fantastic over fixed payments until they learn that they have to change their merchant service provider, process sales for two full days, and then wait an extra day for the ACH to arrive in their bank account. The switch could take a few days to several weeks. Have you ever tried to convert MICROS?! A good account rep can keep the customer patient, but that job gets a lot tougher when the fixed daily ACH guys interject right before the contract is signed. We’ll fund you in two days with no processing change required! The customer would have to settle for a fixed daily payment, but that may be secondary to their stress about switching processing before receiving funds. Many things could cross their mind:
- What happens if the download fails?
- What if they say I need a new credit card machine?
- What if my current processor locked my machine with a password? How long will this delay everything?
- What if I don’t process sales every day? Will I need to wait until I have two full days of activity?
- What if there are additional underwriting steps after I switch?
- Are they going to withhold a percentage from my processing before I even get the money?
- How long is this really going to take? I would prefer if I just had the money now and then I’d feel a lot more comfortable doing the rest.
- I kind of need the money by tomorrow, I really can’t risk this taking longer than they expect.
So when RapidAdvance announced their new Rapid Funding Program, we thought, “is this really what we think it is?” We had Sean Murray reach out to Mark Cerminaro, the SVP of RapidAdvance and we learned the program is real. They can and will fund merchants prior to changing the merchant account or setting up the lockbox. In the interim, they set up a temporary daily ACH repayment to protect themselves should the conversion experience any hiccups. Murray asked if this was perhaps a response to the fixed ACH payment phenomenon that has exploded in the last year. Cerminaro responded (We paraphrased some of his words in this story), “Variable payments offer benefits. Many merchants would prefer to set up their financing this way. Some of our biggest resellers still focus heavily on split-funding as opposed to the alternatives. We believe this program will help both them and the merchant.”
With the slew of new players in the merchant financing market, is speed just window dressing for an old product? An article in Upstart Business Journal called MCAs old! The fixed payment merchant loan seems to be all the rage these days, leaving some to wonder if traditional MCA is on the decline. Cerminaro says that assertion is false. “We’ve experienced substantial growth this year on our traditional MCA product, on all of our products actually. When big companies like American Express and Amazon came in offering their own Merchant Cash Advance or loan program, it made merchants more comfortable that our product and similar ones to it are mainstream. The New York Times even ran an article that listed Merchant Cash Advance as an acceptable form of financing for small businesses. This is all making Merchant Cash Advance more attractive than it ever was before.”
On 7/28/11, we penned an article that said the Merchant Cash Advance industry was waiting for its big moment. At that time, we believed the merchants weren’t using Merchant Cash Advance financing simply because they just hadn’t heard of it. It was the hottest thing that no one was talking about. Of course the era of anonymity is gone and businesses are rushing to get funding hand over fist. The only question now is whether or not this will continue to drive rates down. Cerminaro alluded that some funders are undercutting so much that they’re forgetting to price in the risk. Other industry insiders feel the same way and the debate over it has become the most active thread on the recently founded, DailyFunder.com forum.
Contact Mark Cerminaro for any questions or clarifications regarding RapidAdvance’s Rapid Funding Program at mcerminaro[at]rapidadvance[dot]com.
– Merchant Processing Resource
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The End of an Era
September 19, 2012It’s the end of an era. Sound ominous for a blog that reports on the Merchant Cash Advance (MCA) industry? It shouldn’t. In the last 10 years, MCA firms played in the minor leagues. No one was really paying attention to them and truthfully, a lot of critics didn’t think this business model would still be around. But today it still stands, funders are still funding, and this blog is practically struggling to keep up with the incredible amount of action that is taking place. Coincidentally, 2012 marks the end of the Mayan Calendar. Yes, it’s the end of an era.
MCA Goes From 0 to 60
There were a few big firms in the Mid-2000s (RapidAdvance, Merchant Cash and Capital, Strategic Funding Source, AdvanceMe, etc.) and they’ve all experienced modest success. It was “modest” in the sense that it is nothing compared to today’s standards. The level of play is changing. Wining and dining an Independent Sales Office (ISO) that could bring in $300,000 a month in deal flow used to be all the rage. 300k for one company was 300k less for a competitor. An extra point of commission here or a freebie approval there was enough to make you the big dog in town, at least for awhile. Despite all the supposed innovation and growth, the talent pool remained the same. Lead generators became agents, agents became ISOs, ISOs became syndication partners, syndication partners became funders, and funders became technology companies that were basically clearing houses for groups of funders. If the industry was Sally, Joe, and Tom in 2005, it was still Sally, Joe, and Tom in early 2011, just with new company names or titles. Then everything changed…
Money poured in:
Merchant Cash and Capital Announces $25 Million in new financing 10/4/11
Snap Advances raises $3 Million from TAB bank 11/21/11
Capital Access Network raises $30 Million 2/7/12
RapidAdvance Receives new financing facility through Wells Fargo 4/2/12
1st Merchant Funding | $5 Million re-discount line of credit from TAB bank 6/12
Strategic Funding Source secures $27 million 6/27/12
On Deck Capital raises $100 Million 8/23/12
Kabbage raises $30 Million 9/17/12
Industry insiders loosely redefined what a Merchant Cash Advance was:
Merchant Cash Advance Redefined Merchant Processing Resource 3/25/12
Big companies entered the market:
American Express Announces Their Own Merchant Cash Advance Program 9/22/11
PayPal Pilots Merchant Cash Advance Program in the U.K. 7/13/12
Some funders became licensed lenders in major states such as California:
A New Chapter Opens for Merchant Cash Advance The Green Sheet 6/25/12
Search the California licensed lender registry
New products formed:
FundersCloud creates platform to raise capital and find syndicate partners faster 8/29/12
A charity announces a new way to make subsidized business loans using the split-funding method 9/6/12
These barely scratch the surface of industry events. What used to be a competition to score the local neighborhood ISO has morphed into a race to be the first to partner up with Facebook, twitter, Groupon, and Square. Anyone not moving full speed ahead to integrate technology and social media will be gone in the next 24 months.
May 18, 2012 was the first time we noticed and commented on what was happening. In How The Facebook IPO Affects the Merchant Cash Advance Industry, venture capitalists and Silicon Valley had finally found MCA and there’s no hiding from them. Now it seems all of our far-fetched predictions are not only coming true, they’re happening moments after we predict them. In our last article we instructed everyone to keep their eyes on Kabbage. Six days later they announced they had raised $30 million in new financing and would be expanding overseas. For a company that makes wild claims about the correlation of facebook fans with account performance, all while humorously being named after a boring vegetable, they sure seem perfectly able to threaten the status quo. Nobody dared touch Ebay or Amazon businesses until they came around.
Price
On the cost basis front, the middle ground is eroding even further. We first discussed this phenomenon on April 25, 2011 in The Fork in the Merchant Cash Advance Road. In it, we explained that the combination of competition and defaults were placing downward pressure and upward pressure on price at the same time. Today, there is surging demand for “starter deals” at 1.49 factors that are payable over 3 months at the same time that more and more new lenders are offering 1 year loans at 10%. The low rate, 12-18 month term deals are nothing new. A few funders tried them in the past and most suffered irrecoverable consequences. This is history that the new players didn’t witness.
Some outsiders view the MCA industry as a bunch of Wall Street guys that got fat, happy, and disincentivized to lower costs. On the contrary, one only needs to take a single look at this chart to realize that undercutting the entire market isn’t so genius after all. How can a funder survive with extremely low margins when 15% – 71% of their target market is likely to experience problems repaying their loans? These aren’t our stats, these are FICO’s:
Veteran industry insiders know this and acknowledge that the coming tide of low rate financing is a bubble that has burst before. On the DailyFunder, a few folks have offered this insight:
The mca/unsecured loan biz is very risky. It’s all fun and games till deals start going south. My guess is they either adjust rates to match defaults or go out of business. I know first hand that this is not a get rich quick business. It may look like it is from the outside but once you are inside you see the world differently pretty quickly.
[these new low rate deals are] just like On Deck did. When they first came out, they offered 12 month 1.09’s. Then it dropped to 6 month 1.12’s, then 1.18’s. Now you see 1.25’s to 1.35’s offered by them
Governance
On the other side of the cost war is potential federal regulation. At least one D.C. consulting firm is prodding the leaders of the MCA industry to take a proactive approach on self-governance. According to Magnolia Strategic Partners, MCA is on the radar of regulators and members of congress, especially in light of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new MCA playing field has invited media attention, and not all of it is positive.
The North American Merchant Advance Association is the only organization for industry cooperation but their ability to dictate policies and standards is weak. They receive very little press and their website has been down for weeks. Many argue that they have been effective in minimizing defaults by sharing data on fraudsters. While this does stand to serve the community, it is but a footnote in their orignal intended purpose.
New Barriers to Entry
For the first time ever, potential resellers are facing barriers to entry. Becoming an ISO has long been as simple as owning a phone and purchasing a list of businesses that have used MCA financing before. Today, it’s not that easy. These lists have been sold literally hundreds of times over and called tens of thousands of times over. Pay-Per-Click marketing is dominated by the million and billion dollar firms with money to burn. If John Doe ISO wants to advertise on Google, he better be prepared to compete with the likes of American Express and Wells Fargo. Good luck! Putting skin in the game has also become more of a prerequisite for ISOs to succeed. Funders want to know if a sales agent would put his or her own money into a deal… and then actually commit them to doing just that. The odds are becoming stacked against the undercapitalized and it isn’t likely to change.
In 2009, the most prevalent pitch used by sales agents was to inform prospects that they themselves were “a direct lender” and that anyone else the prospect might be talking to was a broker. “Cut out the middleman and go direct with us,” they’d convincingly argue. This line became less effective when prospects heard this from all five agents they spoke to. Name dropping strategic partnerships will be the new way to build credibility. “We’re partnered with Facebook, twitter, Groupon, and Square,” a sales agent will soon be saying. “Can our competitors make the same claims? Go with us.”
See You On the Other Side
2013 will kick off a single elimination tournament. Funders that didn’t realize 2012 was the end of an era will begin to fade. 2014 will eliminate the weaker firms that remain and by 2015, Merchant Cash Advance will no longer be a term that anyone uses. Big banks and billion dollar technology companies will go on to rebrand all that which the funding warriors of the last decade have worked so hard to establish. MCA will simply assimilate into other financial products. The metaphorical Sally, Joe, and Tom will probably still be in the business, but be working for companies like Capital One, Wells Fargo, and American Express. And as for us…well… we’re going to need something else to talk about. But we’ll keep you posted until that day. 🙂
– Merchant Processing Resource
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8 Advances Are Better Than 1
September 11, 2012Things just got interesting. Your merchant processing $20,000 a month got approved for $26,000 and it was hard fought. Bad credit and some other issues would normally have forced this deal to go the starter route, but not this time. This time you can reflect back on the past few weeks of sweet talking the underwriter and know that it’s starting to pay off. Maybe it was the fact that you obnoxiously concluded every e-mail to him or her with a <3 or 🙂 just to make them feel extra special even if it was in response to a deal of yours they moronically declined.
I understand why you had to decline my client with 720 credit. We’ll get the next one! <3 :-)
And now this time you’re chalking up a tally on the closer board for a deal that shouldn’t have gotten done…that is until your client claims to have received a contract for $50,000 from another source. “There’s no way that can be true,” you tell them while rolling your eyes in frustration. This always happens at the finish line. Someone comes in and shouts out wild figures just to steal their attention away for a minute. But what if there really was a company offering 250% of processing volume to merchants who teeter on the subprime/starter threshold?
Sure there are ACH funders out there who will step in and say “based on their gross sales we might be able to give this merchant 500% of their processing volume!” and the like, but very few people are doing this from a split processing perspective.
We’ve been speaking with Heather Francis at Merchant Cash Group (MCG) and they plan to formally announce the details of their Fast Funding Equity program in the next couple of weeks. Without going into all qualifying parameters merchants must meet to be eligible, we’ve learned that these advances will be disbursed in 8 fixed monthly installments rather than the entire lump sum upfront. And that’s the catch. Under this program the merchant might be contracted for $50,000 but only receive a deposit for $6,000 today. However, there would be no future “renewal agreements” to negotiate or sign. Additional funds would be sprinkled into the merchant’s bank account on a near constant basis of every 6 weeks.
MCG might not win the deal every time with this program but they’re going to give a lot of account reps a run for their money. We all know the pitch of verbally promising additional funds in 3-6 months from the date of the initial advance, which is based mainly on hope that the account will perform and that the funder won’t play games. Put that up against 7 renewals in writing and it’s fair to say we’ve got a good match on our hands. There are some other special incentives for MCG account reps on the Fast Funding Equity program that are being leaked on the DailyFunder Forum.
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G-Day
Today was G-Day in the Merchant Cash Advance arena. GoDaddy.com’s servers were taken down singlehandedly by a jerk (let’s be real here) in the hacker group known as Anonymous. But this time we couldn’t all point and laugh like when it happened to Sony, Yahoo, or LinkedIn. No, this time thousands of MCA agents, underwriters, and staffers wondered why they stopped receiving e-mails after 2pm EST. This time Internet leads stopped coming in, internal databases stopped responding, and websites stopped loading. This time we learned that almost everyone uses GoDaddy for something no matter how much they brag about their systems and technology.
We didn’t take a poll of which companies were affected (we couldn’t because our e-mail was down!), but we did participate in the mass hysteria with several other people that were affected. As this very website went down around 2pm today, we lost contact with our database and e-mail servers. One ISO reported that their website, e-mail, and even their VOIP phones were down (You can have GoDaddy phones?). Another reported that their system was so connected to their GoDaddy servers that they couldn’t even print, scan, or fax! If you’re not a fan of Mondays, today was certainly a good day to make up an excuse to leave early. With systems crashing nationwide, chances are your stapler may not have been stapling right and your boss would have had no choice but to send you home.
Strangely, we have run into the hacker group Anonymous before. Back when they hacked Sony in 2011, they sent a 5 page blistering explanation of why they did it to the U.S. Federal Government. They included a link to our site on page 4 to an area that is now deprecated. That area outlined the basics of PCI compliance. For a week, our analytics showed that most of our web traffic originated from the Department of Homeland Security, Department of Justice, and the FBI. Boy, that was fun. Read that report and see our citation below:
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Who To Beat in 2012
“How’s your month going?” we asked. “Pretty slow, but that’s because it’s August,” said a lot of companies we spoke to. August is typically a slow month in the world of MCA. Account reps go on vacation, small business owners hit the beach, and America subconsciously puts everything on the back burner until after Labor Day. That was quite the opposite for 2 New York based MCA firms, United Capital Source and YellowStone Capital, both of whom reportedly broke single month funding records.
According to YellowStone Capital’s posts on LinkedIn, they funded $11,125,000 in August alone. With that, they gave a special thanks to RapidAdvance, GBR Funding, The Business Backer, Max Advance, On Deck Capital, Promac and Snap Advances.
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Add This To Your Data Points!
Companies that actively work to gain Facebook fans and Twitter followers are 20% less likely to be delinquent on their Merchant Cash Advance. Seriously. Kabbage, a company we mention in blurbs every so often operates independently from the rest of the industry by targeting e-bay sellers, independent Amazon stores, and social media retailers. Some people feel that they are not a serious challenger to the status quo and that their tactics, methods, and headlines are merely shock value fodder for the rest of us to laugh at while we all rant and rave about ACH deals being the hottest thing since Square. The founder of twitter (Jack Dorsey) started Square and it has completely disrupted the payments market that quite frankly was used to disruptions until Dorsey turned everything upside down. We believe Kabbage is a company everyone should keep an eye on.
On another note, our favorite part of Kabbage’s recent press release is actually the level of interest banks are expressing in their business model.
While the firm said it is open to establishing alliances with credit unions, banks have expressed more interest in seeing how they can leverage the technology platform to serve its customers.
-Kabbage
Fresh off our rant about John Tozzi’s recent article in BusinessWeek that concluded Wells Fargo was essentially evil for being involved with MCA companies, we’ve become suddenly self-conscious of what journalists might think. Little do they know that America’s big banks have been joined at the hip with the MCA industry for a while now. Banks are still lending to small businesses, we’re just all doing it on their behalves. TRUTH!
– Merchant Processing Resource
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Follow The Money – MCA
September 8, 2012John Tozzi of BusinessWeek is just about the only journalist that follows the Merchant Cash Advance (MCA) industry. We use the verb “follows” loosely since he manages to write maybe one article per year on the subject. Rarely flattering, he does at least provide something that other writers do not: Substance. In his lastest piece, Wells Fargo Plays Both Sides of the Cash Advance Debate, Tozzi reminded us of something we’ve failed to address in this blog: big banks aren’t just becoming interested in MCA, they’ve already been involved in it for a long time. It also made painfully clear a message we’ve been trying to communicate for years, that ultra low interest rates are simply not feasible in small business lending.
Tozzi accuses Wells Fargo of sponsoring a small business lender that is directly attacking MCA companies while at the same time financing the companies being attacked. California based Opportunity Fund recently began offering a loan program that is…wait for it…repaid by withholding a percentage of credit card sales. They call it EasyPay and they’ve made no effort to hide their belief that they’ve achieved some kind of higher moral ground by charging only 12% APR. In their press release yesterday, they pounced on the competition:
While similar card-based payment systems exist in the private sector in the form of merchant advance loans, they routinely carry exorbitant interest rates that range from 104-177 percent. By contrast, EasyPay loans carry an annual interest rate of just 12 percent.
-Opportunity Fund
Wells Fargo awarded them cash and their “hypocrisy” is apparently history. Why? Wells Fargo has also backed prominent MCA providers RapidAdvance and Capital Access Network. This might come as news to some people, but not to us. What Tozzi may not realize is the main driver of the MCA industry has been and continues to be…banks. Sorry to break it to the small minority of people that suspect MCAs are part of some shadow banking system. Most small businesses are unaware that their funds may indirectly be coming from Capital One, Community National Bank, or even Wells Fargo!
And let’s come to terms with another hard fact about small business lending. Opportunity Fund is proof that you can charge 12% a year and be guaranteed to lose money. In the BusinessWeek interview: “At that rate, the nonprofit is not covering its costs, says Marco Lucioni, the lending director who created the product. Opportunity Fund subsidizes the loans to keep them cheap.”
Subsidies? Whhaaaaa??? Oh you didn’t know? Opportunity Fund is a registered 501(c)(3), a charity. Don’t get us wrong, we love charity and we think it’s wonderful that small businesses in California may be eligible for an EasyPay loan. We can’t help but be bothered though that a charity is attacking the private sector for charging “too much” when they acknowledge that their own rate of 12% (more than double the allowable interest rate on an SBA loan) is entirely unprofitable. We’ve made this charge over and over and over again. The world we lived in where business loans regularly came in at 5% annually was really just an artificial market caused by the SBA’s agreement to reimburse banks for all defaulted loans. But in the real private sector where there is no tax payer default guarantee, or charitable donors to put downward pressure on cost, it becomes clear that the MCA industry is the free market as it should be.
We also reject the characterization that MCAs are “expensive” since there are literally hundreds of funding companies and a thousand ways to structure a deal. That’s the problem with journalists that only drop in once a year or so, Tozzi has no idea how much has changed. Merchant Cash Advance simply means short-term business financing. The costs may be the equivalent of 1% APR or 200%. It could be a purchase of future sales or a fixed daily repayment loan. It might have everything to do with credit card sales or nothing to do with them at all.
The use of the split-funding method by a charitable business lender definitely highlights just how mainstream the ideas of the MCA industry have become. Hopefully they are prepared to deal with the rapidly evolving technology environment. They just might learn there’s a reason that Wells Fargo is also playing the other side. Companies like RapidAdvance and Capital Access Network are well-oiled machines and are respected by the small businesses that fund them. Tozzi calls this awkward. We think the banks in the diagram would beg to differ…
Follow the money and you’ll see why the MCA industry is a bet anyone would make.
– Merchant Processing Resource
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Notice: the diagram may illustrate relationships that are out of date and omits that nature of the financing arrangement.
