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  1. #1
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    MCA Worst Practices

    Sometimes the things I see in this industry make it easy to understand why the industry isn't larger. There are some questionable practices to say the least.

    Here's a couple of things I believe the industry can do without:

    1. Double factoring on renewals. Why on earth is this ok?

    2. Stacking. Pearl takes the cake here. I have a client on the verge of default with us because Pearl thought is was a good idea to intentionally breach my contract and stick one of our merchants with a 1.40 / 6 week deal. I'm not defending the client's poor judgement but Pearl thrives on stacking. It's their thing and it sucks.

    3. Fee netting. 1.30 - 1.50 is enough as it is. Taking $500 - $1000+ off the top is just plain irresponsible. Covering hard costs? Fine. But that's not what is going on 99% of the time.

    There's plenty more but those are the 3 that bug me the most.

  2. #2
    did you say 6 week deal? thats not a merchant cash advance, thats a payday loan outfit! and if the merchant took that, what does that say about the health of that business or the health of their business acumen! wow...the business owners can say no to all of this but so many sign the contracts anyways. sounds like predatory lending to me though if they are doing 40% over 6 weeks on top of an existing advance. but, funder could say- "hey, they accepted the contract anyways"....do you have a non compete in your contract language, if so, both stacker and merchant breached contract...

  3. #3
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    Quote Originally Posted by MCAVeteran View Post
    did you say 6 week deal? thats not a merchant cash advance, thats a payday loan outfit! and if the merchant took that, what does that say about the health of that business or the health of their business acumen! wow...the business owners can say no to all of this but so many sign the contracts anyways. sounds like predatory lending to me though if they are doing 40% over 6 weeks on top of an existing advance. but, funder could say- "hey, they accepted the contract anyways"....do you have a non compete in your contract language, if so, both stacker and merchant breached contract...
    We had a small discussion about Pearl over on the mca forum board. Yea, the merchant used terrible judgement but we had already said no to a renewal. It was too early. So he went out shopping. Was promised all these great things and then when it came time to sign the offer was terrible. He needed the money and Pearl blew his phone up to sign and that's what he did. That's Pearl's angle. Preying on merchants who are desperate and already have a cash advance that isn't eligible for a renewal. How else could you get someone to sign a 1.40 / 6 week deal? Just find the most desperate who aren't eligible for a regular cash advance for any number of reasons and sign em on up.

    My problem is how Pearl markets themselves. They are pushing the stacking angle with iso's. They tell all their iso's exactly how to do it and Pearl knows darn well that all MCA companies have clauses in their contracts forbidding stacking. It's that part that bothers me the most. It's greed in its worst form. Knowingly violating existing receivables contracts and pushing terrible offers. I remember some iso rep from Pearl was calling us a couple times a week to try and fund our turndowns. I asked about the whole stacking thing and the rep went on about how great it is and it's a way to get paid when clients have an advance balance that's too high to be renewed. I asked about the impacts of a stacked deal that could cause a merchant to be denied for a renewal because of breach of contract. And was quickly told how smart Pearl was. They figure out when the merchant would be eligible for renewal and structure the deal to be "inside of that window". Then I asked about when the mca company sees the ACH from pearl on the bank statement that they will still know there was a stacked deal even if it's already paid off. The guy at Pearl said it was MY job to explain to the merchant that they will need a clean bank statement before they can renew. I couldn't get over how slimy they were. I never sent them a single deal.

    There are other stackers out there like Wide and I've talked to the owner Dave before. Total different class of company. Dave doesn't take on excessive risk and makes sure that he feels the company can repay without hurting the bottom line too much. Pearl doesn't give a crap about bottom line or helping anybody. It's pure bottom feeding greed.

  4. #4
    I am sure there are several brokers who like stacking- means more commission dollars for them when their accounts cant get renewal cash fast enough...however, what they dont realize is, by doing so, they just jeapordized their deals from getting a renewal from first funder that has better rates/longer turns. doesnt surprise me though, there are thousands of small businesses who are struggling to keep their doors open and when presented emergency cash, however costly, will jump on it. its not just merchants struggling, but, agents and smaller cash isos who have been tempted to do this to keep revenue coming in as well. its a bad cycle- as they say, the abundance of, or lack of money, makes people do stupid things- its survival mode out there for many- hang on for a wild ride as we approach election day and 2013!

  5. #5
    I know at least 6 companies who stack heavily and make their business out of it. While it is tough to deal with on the lenders side I think all parties involved need to take responsibility from the merchant who accepts, to the broker who brings it there to the lender who stacks it. Usually 3 people take a part. I will tell you Pearl DOES NOT stack every company like most stacking companies do. Guys like Wide, FSC, WGF, TBB,etc... all stack and one isn't different than the next. I have a merchant on ACH right now paying 40% slow due to bouncing payments because they took Wide Lending Groups funds. I guess my point is this is happening a lot and the only way to really deal with it is to educate ISO's and Merchants, maybe put something extra in the funding agreements. I deal with it too and it's an obstacle for sure but it's one that we are dealing with and fairing out ok thankfully.

  6. #6
    Veteran Reputation points: 134971 Chambo's Avatar
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    Some companies who stack use the approach of total gross funding. I.E. merchant ABC (in their eyes) qualifies for a max of $50,000. Funding Company Y only gave them $20,000, so there is room to add $30,000.

    Now the folks out there who simply add for the sake of adding and pocketing quick cash, that's another issue entirely. One, alas, that will only be reigned in with litigation. Every funder should put a clause in their contract about what causes breach and what doesn't. However, there is inherently nothing illegal amount a merchant looking for more money. Simply because funder X's parameters aren't met, doesn't mean funder Y's aren't. The question arises "does the second deal impede upon the first deal?" If the second debit causes collection issues on the first, well, then you have a problem.

  7. #7
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    Quote Originally Posted by Chambo View Post
    The question arises "does the second deal impede upon the first deal?" If the second debit causes collection issues on the first, well, then you have a problem.
    Very good post. I'll pulled the last statement because that is really the only thing that matters right? We've only been stacked (that we know of) once and it is a collection problem. If there are others in our portfolio that are stacked but aren't missing a beat then we don't really care. It's an ethics thing. The merchant that we're having problems with was not a strong candidate on any level. Pearl figured they could get in and get out but as I recently found out, they aren't getting out. Merchant shut them off and is having a lawyer look at it for usary. He's still paying us and has apologized but damage has been done regardless. Remittance is way off and now Pearl is blowing him up with threat of litigation and judgments. With my luck they win their suit and freeze his bank and we get screwed anyway.

    As others have said, it's pretty much something we have to deal with from time to time. There is money to be made in stacking and companies will do it. They should put their money where their mouth is though. If they really believe a merchant can handle both debts then just pay off the advance in place. LOL

  8. #8
    Veteran Reputation points: 134971 Chambo's Avatar
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    Quote Originally Posted by Finance1 View Post
    Very good post. I'll pulled the last statement because that is really the only thing that matters right? We've only been stacked (that we know of) once and it is a collection problem. If there are others in our portfolio that are stacked but aren't missing a beat then we don't really care. It's an ethics thing. The merchant that we're having problems with was not a strong candidate on any level. Pearl figured they could get in and get out but as I recently found out, they aren't getting out. Merchant shut them off and is having a lawyer look at it for usary. He's still paying us and has apologized but damage has been done regardless. Remittance is way off and now Pearl is blowing him up with threat of litigation and judgments. With my luck they win their suit and freeze his bank and we get screwed anyway.

    As others have said, it's pretty much something we have to deal with from time to time. There is money to be made in stacking and companies will do it. They should put their money where their mouth is though. If they really believe a merchant can handle both debts then just pay off the advance in place. LOL
    The ironic part is, try stacking on one of the companies listed who are known to stack and watch them start screaming and wailing and accusing

  9. #9
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    There's a lot of "worst practices", including contracts some ISOs sign that literally shoot themselves in the foot. I found this link floating around on linkedin:

    www.riandalaw.com

    IMPORTANT MERCHANT ADVANCE CONTRACT PROVISIONS
    More and more of my clients are entering into contracts to sell merchant cash advance products. To assist in reviewing such agreements, I will highlight below some important provisions in the typical merchant advance reseller contract and provide hints on the types of provisions you should ask to be added to such contracts.

    Changes to Compensation: Invariably, there is a provision in a merchant advance reseller agreement that allows the merchant advance company to change the commissions it pays to the sales agent. It is important to identify and ideally delete any such provisions. A sales agent should expect to be paid the same for each merchant it originates, assuming of course that the sales agent sells the merchants advance at the same discount rate. At a minimum, an agent should condition that any changes to the compensation plan be only applicable to merchants placed with the merchant advance company after changes in the compensation plan are made. That way, if the compensation plan is no longer competitive, the sales agent can place merchants with a different cash advance company while still getting paid at the same compensation level for merchants the agent has already placed with the cash advance company.

    Indemnity: The sales agent should seek protection if the actions of the merchant advance company cause the sales agent to get sued. For instance, if a merchant advance company is aggressive in its collection efforts, the merchant could sue the merchant advance company and the sales agent that originated the merchant. The merchant should seek protection through an indemnity provision that states the merchant advance company will provide a defense for the sales agent in any lawsuit that arises from the actions of the merchant advance company and that it will also pay to settle that case.This is also an issue to the extent that the merchant advance company violates any laws in making the advance to the merchant. The indemnity provision should include a statement that if the merchant advance company is found to have violated any laws, the merchant advance company will protect the sales agent from any such claims.

    Referring the Merchant Back: The sales agent should protect its relationship with the merchant if the merchant needs additional payment processing goods or services. To that end, the sales agent should add a provision to the agreement that states if the merchant wants any other goods and services, wants to get another merchant account or in any way needs any help unrelated to the merchant advance, that the merchant advance company will refer the merchant back to the sales agent. A sales agent does not want to have to compete with the merchant advance company when it comes to making more money from the merchants.

    Exclusivity: Many merchant advance agreements state that the sales agent can only send merchant advance contracts to the one merchant advance company. It is important to identify such exclusivity terms and make sure they are deleted from theagreement. Just to make sure, you would also want to add a provision that states unequivocally that the relationship is non-exclusive. Otherwise, if you send merchant advance contracts to a competitor, the merchant advance company that thinks you are exclusive could use that act as a reason to termination your compensation under the agreement.

    Non-Solicitation: The sales agent needs to be able to protect its agent base and potentially the merchants it places under the agreement. As such, the sales agent should have a non-solicitation provision added to the agreement that states the merchant advance company cannot directly contract with the sales agent’s sub-agents to provide them with merchant advances, or any other payment processing services for that matter. An agent does not want to open itself up to potentially losing its sub-agents to the merchant advance company. The same is true of the merchants the sales agent places with a cash advance company. Once the merchant advance is over, the sales agent should be able to continue to provide payment processing to the merchant if it does not receive an ongoing residual from the merchant advance company or a related entity. The sales agent should seek to preserve its relationship and the profits it derives from the merchants under all circumstances.

    Attorney’s Fees: A sales agent should include a provision that states the prevailing party in any litigation is entitled to recover its attorney’s fees from the losing party. A sales agent will most likely sue under the agreement if it is not paid its commission by the cash advance company. If that happens, the sales agent has an advantage if it is able to recover its attorney’s fees as damages along with the unpaid commissions. A cash advance company will be more likely to settle the case sooner in the litigation process given the prospect of an ever growing legal bill that it is going to have to eventually pay.

    Commission Amounts: Many cash advance contracts are structured such that the sales agent is paid part of its commission when the merchant initially gets its funds. In addition, most contracts provide that the sales agent also gets paid a portion of the funds that the merchant pays to the merchant advance company as the merchant repays its obligations. The sales agent should try to get as much, if not all, of the commissions it receives paid up front rather than be paid as the merchant repays its obligations. In addition, the sales agent should make sure that the commissions are fully earned when the cash advance is made and that the commission cannot be charged back if the cash advance company cannot collect from the merchant. Finally, the sales agent should make sure that the agreement clearly allows for the sales agent to be paid each time the merchant renews and takes another advance from the cash advance company.

    Commission Payments: The sales agent should add language that makes clear that the commission payments continue for as long as the cash advance company is making money from the merchant, even if the agreement is terminated. The sales agent needs to ensure that it is paid on renewal cash advances as a high percentage of the merchants renew the merchant advance and continue to do so repeatedly. It is important that the sales agent ensure it is paid on the renewals for so long as the merchant continues to renew the cash advances so that the sales agent can maximize its potential income under the agreement.

    Make sure you carefully review any merchant advance contract for these terms and any other provisions that could potentially effect your commission payments. Cash advance appears to be here for the long term and most sales agents will be able to make a tidy profit from this new segment of our industry.
    __________________________________________________ ______________________
    * Paul A. Rianda, Esq. is an attorney who has specialized in providing legal advice to the bankcard industry for the past 10 years. For more information about this article or any other matters, please contact Mr. Rianda at www.riandalaw.com, (949) 261-7700 or via email at paul@riandalaw.com

    ** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.

  10. #10
    Paul Rianda is a good attorney who gives good advice. Call him and talk to him about the MCA business. He will share some stories with you if you end up retaining him for your needs.

  11. #11
    Veteran Reputation points: 134971 Chambo's Avatar
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    Seeking counsel to go over contracts was all well and good in the beginning, but many of the MCA's out there simply won't accept you if you do not adhere to their terms. They already have a portfolio, have the renewals, the other ISO's. If you want to make waves, they'll tell you to take your business elsewhere.

    Also, the samller ISO who might have the resources for counsel is subject to the whims of the MCA anyway. If the MCA arbitrarily decides to change the terms, what is the ISO to do? They already have the business there and they don't have enough deal flow to really have a voice.

  12. #12
    the stacking continues- accounts with Pearl, Yellowstone, Wide Lending a combo of one of these and another MCA are popping up more an more-....

  13. #13
    Veteran Reputation points: 134971 Chambo's Avatar
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    Don't cry about only those three. There are more prominent MCA's out there stacking as well.

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    I cannot believe that anyone can really say they think this is a good idea for any customer. As far as I can see the only one it benefits is a greedy and unethical sales person that does not care about their customer at all.

  15. #15
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    Or it can benefit the customer that knows he won't be around much longer so he's looking to cash out quickly. This type of deal cuts both ways.

  16. #16
    heres a segway back to the post by miked on pitfalls to watch out for- a large LOAN companies rules on ownership of lead-.....

    Lead Ownership Rules....

    you only have 5 days from submission to get any missing docs in or ANY partner can submit deal and take over credit for deal-

    after a loan is paid off, if more than 90 days pass, another partner can submit and take over credit for deal-

    90-days- if you dont send in deals over a 90-day period, all renewals are forfeited....

    10 days- amount of a time an approval is valid- after this time- another iso can submit and take over credit on deal-

    sounds like a lot of gotchas on how NOT to get credit for a deal.

  17. #17
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    I don't remember posting that. Might have beens someone else. I have heard of losing rights to all your renewals if you don't send in deals for 90 days. What's the point of being an Independent Sales Office at that point if you are not really building something up independently? If all your future income hinges on the condition that you continue to do business with that company, then you're basically an employee of that company.

    There are funders in this industry that think they control and own the merchants they fund even if it comes from an ISO. They go out and raise capital based on this value. At the same time, the ISOs think they control and own the merchants they acquire and the funder just happens to be a third party taking liability on the advance.

    Just wait until one of these big funders gets sold or goes public. One of these parties will be in for a rude awakening.

  18. #18

    JD Merchant Capital

    I have a merchant that is doing 300k a month gross and 10k in processing a month have a balance of $ 27k have 18 negatives days every month because new logic is pulling 1000 a day from there account, does anybody know a company that will fund.

  19. #19
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    Moral Hazard in the MCA world.

    Of course the merchant is going to stack. They're at wit's end and need money. They need to be taught how to manage their business without supplemental cashflow so they don't repeatedly get into these revolving-door advances.

    Anyone who sells this product as a way to keep a business afloat is ultimately doing the opposite to that business. I have a number of merchants who would stack if I called them tomorrow. I experimented with stacking once, won't do it again.

    This product was intended to be an alternative to traditional loans for people to grow their business, not kill it.

  20. #20
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    I 100% agree with you Chambo. The main issue is that there are people who stack without regard for anything except the money it puts in their pockets. And while I agree that there are 3 parties involved, if the reps stop pushing these deals and the funders stop stacking it would allow funders to give better offers because they wouldnt underwrite in fear of being stacked on and causing an unforseen default. You can't underwrite properly and give merchants the money they deserve because one (the UWers) must expect to be stacked on and put their funds at risk. The only one who wins is the broker.

  21. #21
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    All that I'm reading is precisely why I /we started Superior Capital. While the company is new, we are not as this is Bob Gaskin, a 14 year vet in the business and a former Director at AdvanceMe for nearly nine years. We opened Superior Capital to provide higher risk deals a fair shake without gouging on fees and with more than competitive rates. For more information, call me at 678-978-4625 / 866-606-4545 Atlanta

  22. #22
    Wide is the worst , they pay the least then they pay 1/2 on renewal ... they really are without resrvation the worst out there .



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