It Looks Like 2006 All Over Again for the Merchant Cash Advance Industry
As a follow up to “A Revival of the Merchant Cash Advance Industry” that appeared in the February 2012 Navigator, we took a look at the latest developments in the Merchant Cash Advance (MCA) business. Recent events seem to confirm our hypothesis that the industry is experiencing an extraordinary recovery:
- In this year’s Electronic Transaction Association (ETA) conference, nine MCA companies exhibited their products; five were first time exhibitors. This is a notable increase in the number of MCA exhibitors up from only 4 in 2010 and 5 in 2011. Most of the new exhibitors were relatively new players in the space, while there was one old player doing business under a new name and new management.
- In April, Rapid Financial Services, LLC (dba RapidAdvance), one of the major MCA providers in the U.S., announced that it had secured a new financial facility from Wells Fargo Capital Finance. The facility – in the range of several millions of dollars – will be used to finance Rapid’s MCA business and its small business lending program.
- Also in April, Capital Access Network (CAN), the parent company of AdvanceMe and NewLogic Business Loans, the largest providers of MCA in the U.S., announced it had expanded the range of SIC codes it serves. CAN is now including online merchants in its list of MCA eligible merchants. Traditionally, MCA companies have shied away from online merchants due to the merchants’ perceived riskier profile – the idea being that it is easier to shut down a website and disappear than to close down a brick and mortar store. The CAN announcement also mentioned other small businesses, without specifying them, that previously had been underserved will now have greater access to capital.
- In February, CAN (AdvanceMe and NewLogic Business Loans) announced that it had received an investment of $30 million from Accel Partners, a private equity firm. Accel Partners’ investment rationale pointed to an increasing need from merchants for credit and working capital, the inability of banks to play effectively in this market, and Capital Access Network’s successful approach to the business.
These developments are noteworthy for several reasons. For starters, the ETA is a venue where MCA companies promote their product to potential referral partners and connect with acquirers and ISOs in order to strengthen their ongoing referral relationships. The larger number of MCA exhibitors seems to indicate first, the industry is growing again, and second, MCA providers are devoting more resources to secure better and stronger referral relationships.
During the worst times of the financial crisis, funding sources for MCA companies mostly dried up. MCA companies also had to reduce the number of merchant categories eligible for their product due to the increased default rates. Merchants associated with the housing sector, such as furniture stores, were the first to drop from the lists of eligible merchants. The fact that the MCA industry is attracting the interest of debt and equity financing sources and that MCA companies are looking to expand their merchant target lists are strong indicators of the bullish sentiment around the industry.
This seems to be the same bullish sentiment that surrounded the industry in 2006, when there was a constant influx of new MCA providers into the industry and what appeared to be unlimited financial sources. What might be different now is the experience accumulated in the industry during the recession. In the last few years, and as a result of the mounting losses that the industry suffered during the economic crisis, MCA players have implemented more conservative risk management practices and procedures.
Also, the class action lawsuit filed against AdvanceMe in 2008 in California and the subsequent 2011 settlement has served as a guide to the industry on how to conduct business and avoid exposure, at least in California. The plaintiffs claimed that the AdvanceMe transactions were not purchases of credit card receivables, but instead they were loans with usurious interest rates. The lawsuit was settled for approximately $23 million without any admission of wrongdoing by AdvanceMe. As a result, MCA companies are taking steps to ensure that their contractual terms accurately reflect the nature of a cash advance program, e.g., no personal guarantees for repayment obligations, no fixed repayment period, among others.
As the MCA industry recovers and grows again, it will be interesting to see if MCA providers stay wise and avoid the mistakes that plagued the industry between 2006 and 2008.
For more information, please contact Janinne Dall’Orto, Senior Manager specializing in Merchant Acquiring, firstname.lastname@example.org
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