By Erik Stamell
Managing director
Retail Capital
Think Beyond
Traditional Financing
Merchant cash advances offer a viable alternative to
bank lending — at a price
Since the financial criSiS hit in
2008, tight lending has significantly
impacted the availability of credit to
all types of borrowers and to small
businesses in particular. Many commercial mortgage brokers have felt the
squeeze as they try to help their clients
find financing. They may have, however, found a solution in merchant cash
advances (MCA).
The MCA industry has been around
for more than a decade, but interest
in it grew during this recent economic
downturn, as banks and other traditional lenders almost exited the marketplace. The size of the MCA industry
in the third-quarter 2011 was a little
higher than $150 million — provided
mainly to small businesses. That put
the industry on pace for $600 million
this past year, a figure that would surpass 2010’s total, according to the Merchant Processing Resource.
how responsive the merchant is in the
due-diligence process.
It is important to remember that
since it is an advance — not a loan —
there is no personal recourse to the
merchant, and there is no set term for
payback. The MCA company holds
back a percentage of credit-card volume until it is paid in full, which can
take months or years, depending on
the merchant’s credit-card volume.
This is helpful to many businesses that
experience fluctuations in credit-card
volume due to the seasonal nature of
their business or other factors. In slow
months, the provider holds back the
“Although the deals are
small, the commissions
are high and can be
an important addition
to a mortgage
broker’s existing
revenue streams.”
same percentage, but the paid-back
amount in the aggregate is less.
While many MCA companies will
check a merchant’s credit, it is generally not a factor as to whether or not a
merchant qualifies for a cash advance.
the funds be used to help the business
grow, the use of funds is not necessarily a focus of the provider.
The risk to the MCA provider is whether
the merchant will remain in business long
enough to pay back the principal and the
factor rate. Accordingly, most deals in the
industry are planned to take from four to
10 months to pay back — even though
there is no set term.
MCA can also help fill out a capital structure that does not provide for
enough leverage in the event that a
borrower’s equity is not enough to get
a deal closed. Since future credit-card
receivables are not an asset that merchants monetize, MCA often works in
conjunction with equipment leasing
and asset-based lending.
One other great aspect of the industry is the high commission structure.
The broker of a deal typically will receive between 6 and 8 percent of the
right-to-receive or payback amount.
Although the deals are small, the commissions are high and can be an important addition to a mortgage broker’s
existing revenue streams.
There is a number of reputable capital providers in this sector, and the
number will continue to grow to meet
the increasing demand. It makes sense
for mortgage brokers to consider establishing a partnership with one of the
leaders in the MCA industry to take advantage of a growing niche. •
The process
An MCA is different than a loan. It is
a purchase of future credit-card re-
ceivables, or effectively a factoring
of future credit-card receivables. The
MCA company will make an advance
to a merchant based in part on the
merchant’s historical average credit-
card volume. The merchant will pay
back the advance by authorizing the
MCA provider to hold back a certain
percentage of its credit-card transac-
tion revenue.
Capital uses
Merchants can use capital for marketing, expansion, remodeling, or inventory and equipment purchases — they
can even use it to pay off tax liens. Although the MCA company prefers that
Erik Stamell is managing director of Retail
Capital. The company focuses on providing
merchant cash advance to retail operators
across the country. Deals range from $5K to
$250K. Reach Stamell at (248) 633-1223 or
estamell@retailcapital.com.
resolved since 2007, of which more
than $63 billion was resolved in the
18-month period from January 2010 to
June 2011, according to Fitch Ratings.
Here’s how that $63 billion in loans
was resolved:
• 39 percent were modified
• 16 percent were reinstated — the
problem cured itself or the borrower
decided to pay out of pocket to make
the loan current
• 15 percent were a discounted pay-off,
and the average discounted amount
was more than 50 percent
• 12 percent were paid in full, which
were most likely maturity defaults
that were eventually paid off
• 9 percent were sold via a note sale
• 9 percent were foreclosed and sold
as REO, which might be because the
recovery rates have historically been
the lowest on foreclosures and REOs
The loans that were modified
have three interesting common
characteristics:
• • •
The first wave of delinquencies has
hit the beach, and the industry has
been dealing with the ups and downs
of its aftermath. The question now
is whether a second wave is within
sight and how much damage it could
cause. •
