2011 2nd Quarter MCA-Industry Statistics

Given the young age of the Merchant Cash Advance product, it is very difficult to come up with industry statistics. There are no public companies that offer the product, so data is limited to self-reporting, legal filings, etc. American Finance Solutions believes that those who provide estimates are mostly taking a shot in the dark.

One source that does seem to have a decent handle on the industry is Merchant Cash Advance Resource. Personally we would consider this the best estimate for volume of total MCA business being reported. Basically the best "guesstimate" that we know of.

For the 2nd Quarter 2011, they are reporting approximately $128M in total fundings for the quarter with a total of over $257M in fundings for the first six-months of 2011. Note: American Finance Solutions is not endorsing these numbers or know the source.

One area that appears to be is the most active firms section. I believe they are listing the actual number of fundings not the total dollar amount when ranking funding companies. Definitely Advanceme is the 800-pound gorilla, however data on all other firms is very minimal with most closely guarding their data.

You can view the 2011 2nd Quarter Merchant Cash Advance Statistics by clicking here.

Hard And Soft Fraud On The Rise!

Looking back out our application flow over the second quarter at American Finance Solutions (AFS), one clear trend emerged. Fraud submissions have tripled over historic averages. Knock on wood, AFS has successfully avoided funding any of these merchant cash advance contracts in 2011.

When classify fraud deals, we break them down into two categories: Hard and Soft. Hard fraud is when outright crooks are submitting applications for businesses that do not exist, have stolen a business' identity or a desperate actual owner has altered his financial documents to qualify for more favourable terms.

Soft fraud is when a legitimate business has submitted actual documentation, but is still not being truthful about his or her business. For example, they give false landlord contact info to achieve a good rent verification when they actually months behind on rent, present a paid in full letter from their current funding company when they still have a balance, claim to never have had an MCA when they were previously in collections with a competitor, just filed bankruptcy or conveniently forget to inform us that they just consolidated their two locations into one. The scenarios.

Thanks to the North American Merchant Advance Association (NAMAA), most of our fraud is caught upon the initial application submission. Thanks to a great database, fraud alert network and dedicated NAMAA contacts for each member company a funding company can catch fraud early and not waste personnel time on bad deals and keep their sales partners more satisfied since they do not waste their time as well. If you are a funding company, I cannot imagine putting any money on the street without checking with NAMAA. For such a nominal monthly fee you'll save thousands. In AFS, first month we saved over $200,000 in fraud deals that we may have funded.

The reputable funding companies are getting better and better each month at finding both hard and soft fraud. This is very good for the industry. As the fraud rates drop, the industries overall bad debt continues to plummet. My personal estimate is that across the board, bad debt has dropped by 50% over the past 12 months due to fraud detection. This has resulted in a significant cost savings to our legitimate clients. Now, it is not uncommon to see deals with expected paybacks with factor rates well below 1.3, this was unheard of in 2009.

If your a sales organization representing the Merchant Cash Advance product, make sure all your funding sources are with the NAMAA. You'll end up operating much more efficiently by focusing on fund-able deals. Nothing is worse than chasing documents for a week, arguing with your funding company about the validity of paperwork and only hearing a recorded verification call where the merchant is busted! Again, know your merchants well so that as a sales organization you can build a strong performing portfolio with a few funders (it will go a long way in getting special favors or pricing for future clients).

When To Confirm Competitor Payoffs?

In the Merchant Cash Advance world, paying off a competitor's advance is a somewhat common practice. On about five percent of our new clients we have to wire the funds to a competitor to buy them out so that American Finance Solutions is in first position for the credit card receivables.

The catch for our sales partners is when to make the contact with the competitor to confirm the payoff amount and payment instructions. There are advantages to calling early right when contracts are received; and waiting to just prior to funding.

When calling early, AFS risks tipping off the competitor that they are about to get bought out of a deal. If its a good, profitable client (which is most often the case) the competitor will often "instantly approve" the a renewal and offer to wire funds that day and beat our offer. Of course they can do this since on a renewal the compensation to the agent of record is much lower than the new agents upfront commission. Most of our agents prefer that we don't tip off the competition (especially for the small NY-based upstarts with less than perfect reputations) and work on getting their deal funded.

So most often we wait to the day funding to confirm the amount. Most often the competitor is a NAMAA-member and we call the NAMAA contact. (All NAMAA members have agreed to provide truthful, relevant information on clients when answering payoff questions; and its been working for the past six months with no issues that AFS is aware of). Sometimes we find out the reason that the client cannot renew is because of collections issues, fraud (altered payoff letters) or trying to get double funded on the same day by the old and the new MCA company. Of course AFS is not going to be funding clients with these situations.

Of course our sales partner is not happy, they just spun their wheels and invested much time and energy for no reward. Believe it or not, we are not happy just having wasted staff time and incurring expenses for reports, site surveys, etc. In our view though the frustration and expense lost on a few clients is worth it to not take the risk of calling early and losing the deal.

Again, though for our sales partner we cannot stress enough to know your client! Find out the funding date of their current advance and deal terms. If the contract payback amount is $50,000, they got the advance six months ago and the balance is over $30,000 there's an issue with payback. You'll end up being more productive and funding more deals!

How To Speed Up Your Funding And Avoid The Dreaded Killed Deal

As the world of Merchant Cash Advance continues to mature we are seeing that price for the product is becoming less of differentiator. Service and speed of funding contracts is quickly becoming the factor for funding companies. At American Finance Solutions we've taken significant steps by investing in systems and people to address this issue. Over the past six months we have improved this significantly by two business days with most contracts funding in under four days.

Even given all of your improvements, AFS does not control all the aspects of a deal. Both our clients and sales agents can greatly influence the speed of funding and ensuring that an approval doesn't get killed in the due diligence process. By following these two simple steps you'll greatly improve your success rate.

1. Don't Hide The Bad & The Ugly - So many times we see merchant and/or their sales agents trying to brush over some negative information about the business such as recent tax liens, being constantly two weeks late on rent or some other issue. With all the technology and tools that funding companies use such as site surveys, legal/public database aggregates, background checks, reverse phone look ups and even simple Google searches we find out about the issue eventually.

Our best sales agents (coincidentally the once with the highest compensation) present the Good, The Bad and even The Ugly on merchant's current situation. This allows us to properly structure and price a deal correctly upfront that doesn't put the client in a financial hardship, meets his or her needs, fits the funding companies risk appetite and yields enough margin to make sense for all parties. Often an inexperienced sales agent selling on price is also unaware of the Ugly. Top agents who are true finance consultants will educate their merchants to give them the whole story, that way they can present the entire situation in the best light to MCA funders to maximize approvals.

Nothing frustrates clients more than having to change terms or require payoffs of past due rent or just simple requests for tax lien payment plans at the 11th hour just prior to funding. Worse yet, when a company's due diligence staff discovers the undisclosed Bad or Ugly they start worrying about all aspects of the deal and client. The last thing the merchant or the sales agent wants to do is to turn a verification process into a Sherlock Holmes investigation adding days into the process and even resulting in the dreaded Denied stamp.

2. Have/Set Realistic Expectations - So often at AFS we receive contracts back and immediately give our Welcome Call to the merchant to confirm contract terms & payment method and inform them of the due diligence process. They are shocked that it is going to take three or four days to get their $50,000. It blows me away that intelligent business owners think that from a simple one-page application and a few bank statements that they faxed in a day ago will suffice for a company to wire them tens of thousands of dollars.

Unfortunately landlords are not always available and take a day or two to call or fax back. Setting up the collection method with a new credit card processor and ensuring that the withholding split is in place takes a couple of days usually as well (if there's a point of sale system that needs to be reprogrammed it could take a week or more).

More often than not its the weak sales agent that has promised funding the next day in order to get the deal that has created the issue. Sales agents have to take the 30 seconds to explain the process and set a realistic explanation that funding will be in three or four days and the repayment method must be in place (so download your terminals asap!) This way the client isn't blowing up the agents phone every hour, has a great experience and is happy to refer more clients since with a simple set of expectations he is delighted rather than frustrated. (Tip to sales agents especially - calling the funding company every hour to check on your deal doesn't speed things up, it actually delays it because people are using their time to talk to you rather than work on getting the deal funded).

By following the two simple steps above, both merchants and sales agents will see a dramatic increase in their funding success rate with minimal frustration.

In 2011 Banks Are Getting Tighter, Not Loser As Expected

The most recent report by the Wall Street Journal, reports that for the 1st Quarter of 2011 small business lending from banks and other institutions decreased by 8.6% for 2011 versus 2010! All the hoopla of and marketing pushes by big banks appear to be just smoke and mirrors yet again.

In fact when you drill down into the data the numbers for banks (small business' historic solution for working capital), the numbers are even worse. For business loans less than $1 million, banks reported a drop of 14% and other small lenders fell 3%.

Now if you're an established business with significant revenue (in excess of $25 million) big bank lending has actually increased. Sounds like the same old story, that banks do not want to lend the lifeblood of the American economy, Small Business, when they need capital to grow and expand their business. But as soon as a business established and cranking out cash flow they open up the coffers, but of course it has to be collateralized and with personal guarantees!!!

Its no surprise that American Finance Solutions, had a historic record June in terms of funding amount. We continue to see a steady increase in applications and funding amounts. Some of our recent fundings include a well-established retailer with an 800 FICO but no real estate and a three location auto repair facility that has been established for 12 years.

For those that sell and market the Merchant Cash Advance product, there has never been a better time to build a strong portfolio!