Unfortunately what is bad for the overall economy ends up being good for the Merchant Cash Advance industry. When the economy starts shrinking, traditional lending sources start drying up quickly, and when available the cost goes up. That forces those that need capital to turn to alternative sources.The political events over the past week coupled with the stock market realizing the reality of the American economy has us in store for our second dip in the waters of economic recession, in my opinion. With unemployment (true unemployment is definitely above 15% and if you want estimate under/unemployment some experts are quoting 20%+) showing no signs of recovery, government stimulus spending coming to end and definitely more foreclosures in residential real estate (and the shoe hasn't even begun to drop in commercial!); its hard to refute that the next 18 months will be tough.
The end result will be significant growth for alternative lenders with Merchant Cash Advance and its ancillary products thriving. The number one reason will be pure demand and lack of suppliers. Obviously the demand will be there just as it was in 2008 when the last recession started. However, I believe the suppliers will not come rushing in as they did previously. You need dump trucks full of cash to become a serious player in this market and if you think its tough raising money for your traditional business or hot Internet start up. Imagine going out to the capital markets and saying, "I need cash to finance working capital in the sub-prime, small-business market and oh yeah, most of my clients are sub-700 FICO with no assets."
Another reason is that MCA will thrive is that funding companies will be able to easily pass along their increased cost of capital to their clients. With a typical factor rate now being 1.32, its not that difficult for a client to swallow 1.35 at the same terms. Even if real interest rates double or triple, I expect the effects to be negligible.
The key will be the qualification and underwriting criteria that the funding companies follow. In 2008, the MCA landscape was like the Wild West with anyone who had a business getting funding. The ten major funders left, American Finance Solutions included, learned their lessons the hard way. Expect most to focus on SIC codes and business models that "make sense" in a recession. More on that in my next post.
