Investing in Merchant Cash Advance Industry
Banking as we knew it has undergone a paradigm shift. Few, if any, banks are serving the retail needs of small/mid-size businesses.Merchant Cash Advance is the new financing product for small /mid-size business owners. Marsh & McLennan, estimates that there is a potential $80 to $120 billion in unmet funding needs.
Venture capitalists, regulated banks and Google Ventures (venture capital arm of Google/Alphabet) have poured money into companies such as OnDeck Capital (ONDK) which went public in late 2014, and which offers small business loans, and CAN Capital, a merchant cash advance company, which in April 2015 raised $650 million from Morgan Stanley, JPMorgan Chase, and other banks
Small businesses in the United States are integral to the U.S. economy and the vibrancy of local communities, employing approximately 50% of the private workforce.
In 2010 the MCA industry funded $500mm
$8.6 billion in 2014
$10.7 billion in 2015
$20-30 billion 2018
This is a dynamic and expanding industry in hyper-growth mode, in addition to being a tremendous opportunity for investors.
• Short duration – measured in months, not years.
• Double-digit rates of return, well above average yields.
• Low $100,000 minimum
• Great for self-directed IRA<
• Advances are spread across a diverse array to minimize risk exposure.
How It Works:
Merchant or Business Owner contacts the Funder seeking working capital (advance).
• Funder requests information for underwriting from the Business Owner, typically 6-12 months of bank statements and tax returns and/or financial statements. Since one of the main criteria is strong cash flow, it is important for the funder to carefully examine the companies’ bank statements.
• After receiving the necessary financials, the file is sent to the underwriting department. A thorough background, credit check, and bank verification is completed. If the data received is in line with the underwriting guidelines the funding is approved and offer is made based to the business owner.
• Example: Merchant is approved for a $100,000 Advance against the future revenue (receivables) of the company. The term of the Advance is 100 days. Since the contract is in the form of a Revenue Purchase Agreement and not a loan, it is assigned a factor rate which is the fixed cost of money. The factor rate in this example is 1.30. Meaning that the Merchant would repay $130,000 over the 100 day period. The Advance would be repaid 1,300 per day and would be withdrawn electronically every day as a set percentage of the Merchants daily collections.
• The Merchant accepts the terms signs and returns the contract. The Monies are forwarded to the Merchant by ACH or Bank Wire.
We have over 15 years experience in Merchant Cash Advance Investments.