The Merchant Cash Advance/ Alternative Business Lending Industry

TABASFUNDING has been providing funding for entrepreneurs to expand or acquire businesses since 2002.  We are an alternative to traditional bank financing, which since the recession has become more difficult to obtain for small businesses.  Even though we are a bit more expensive, we look pretty attractive because we have a lot of flexibility.  The activity in this market has not gone unnoticed,  hence the growth of Merchant Cash Advances.

While I’ve been aware of this  industry, and even signed up to represent On Deck Capital, one of the bigger players, I was not attentive to the money being thrown at it. On Deck, Kabbage, and some others are considered ‘TECH” firms, and have raised millions from Silicon Valley funders. They use algorithms to evaluate creditworthiness and to decide whether a borrower is able to repay. With CD rates at 1% and no bonds worth buying, investors are hungry for something with a yield. There are now dozens of firms doing Merchant Cash Advance lending. These businesses have blanketed the internet with pitches for what they do.

What is a Merchant Cash Advance?  It is a loan of $5,000 to $100,000 made to a business that accepts credit cards. When a merchant accepts credit cards, a day or so after the card is successfully swiped, money is electronically deposited into the merchant’s account by Visa, American Express or whomever.  With Merchant Cash Advances, the lender obtains permission to direct debit the bank account of the borrower after the credit card receivables are deposited.  They debit the account DAILY to pay loan interest and principal.

Loans are typically repaid quickly, within 90 to 120 days, with interest rates of 30 to 40%.  Annualizing those rates makes the interest on this type of lending well over 100% annually.  I am surprised that borrowers take this financing a these rates, but there must be are a lot of desperate borrowers out there, or perhaps the Merchant Cash Advance lenders don’t explain what the borrower is getting into.  I think this whole industry is going to be news on the front pages as the next Payday Lender-like scandal.  We’ll have to wait to see.

As opposed to the Merchant Cash Advance, our loans typically repay over 3 to 7 years. Sometimes, we have a period of interest-only to match the borrowers’ expected cash flow.  In addition to the money, our borrowers get our counsel. Being an entrepreneur can be a lonely path, and having someone to bounce things off  can be helpful.

Borrowing for expansion or acquisition can be a good thing. Alan Wilen of Eisner Amper CPA’s recently did a good column on how borrowing to fund profitable growth makes sense. http://www.eisneramper.com/debt-maximize-profitability-0414.aspx?c=trends

If your business stands to make more from the profitable new business, borrowing makes sense.  If you have a good business opportunity to expand, and need reasonable funding to do it, please give me a call at 610 896 2400 x 11.

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