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).
