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  • Disruption in the Unsecured Small Business Lending Space

    MCA, ACH loans, cash flow lending; whatever you want to call the product, they are all unsecured business financing targeting small businesses across the US. It really doesn’t matter what the collection method is; financing companies in the space are filling the void left by big banks (which I don’t think will be coming back anytime soon).

    Starting in 2013 and continuing into 2014, we are predicting that this market place will undergo some major changes as the market begins to mature. This process really started to happen in 2012 with the proliferation of ACH repayment programs to reach virtually every small-business type and increased the market scope dramatically.

    With this market growth and high adoption rate of the product we will start to see the emergence of a handful of players who will be able to successfully lower their cost of funds while keeping bad debt in check. As these players do so they will start to gobble up smaller competitors who do not successfully transform themselves into some niche-market player. Just this past week Rapid made one of the first acquisitions of this type. By the end of 2014, I predict that there will be only four or five large funding companies with a bunch of small players that may specialize in certain industries, sub-sub-prime, geographic areas or enjoy some preferred relationships.

    Cost Of Funds/Can You Fund Deals With Investor Money Forever?

    While most of the established players (Advanceme/Newlogic, AFS, Amerimerchant, BFS/GBR, Rapid) have been servicing the market for years,. While each has its own pricing and products, the range of factor rates and payback terms are fairly comparable for these “for profit” companies. Yes there are always new funders that come into the market place and try to gain market share with low rates. If you’ve seen the public financials on IOU you know that they can only fund while the investment monies continue to flow. Same goes for some of the other funders out there that are on their round D or even E of capital events.

    The key phrase in our business is “unsecured” financing. When trying to raise capital to start or grow a funder this phase is the kiss of death when approaching most traditional capital sources. All of the established players and the new ones start out either with hedge fund money or expensive re-discount lines with a cost of at least 12% and more likely closer to 18%. So that’s just a cost of funds of around .15 on a 12-month factor rate before paying any overhead, employees, commissions to ISOs and not to mention bad debt.

    In 2013 our financing is definitely going more mainstream and with the growth the few companies with scale are finally able to enjoy their economies of scale and secure financing in the mid-single digits. While the majority funding companies that have lower cost of funds are experimenting with different payback terms, investing in operations/technology, plowing money into marketing for their own sales channel; soon they’ll start driving growth by passing along the lower rates.

    Investing In Technology Will Payoff

    As a finance company begins to grow, it gets better and better at measuring risk with or without technology. Thinking back to the days of 2006 and 2007, a business owner just had to have a weak pulse, credit card sales average of $5,000 per month and didn’t even have to show a bank statement to get $20,000 from First Funds (and the sales partner was netting 50% of the factor rate in commission sometimes.)

    We’ve come a long way since those days. The “for profit” funding companies that survive have now each executed thousands and thousands if not tens of thousands of contracts. Each organization learns from both the successful and not so successful clients that it has funded. Good technology implemented and more importantly used properly allows companies to leverage this learning. With serious investments in technology (think hundreds of thousands, if not millions of dollars by each company) over the past few years, the predictability and client-modeling has vastly improved. A company can leverage this to drive growth and keep bad debt at acceptable levels in the five to eight percent range.

    More importantly though is the speed of making the decisions while keeping bad debt under control. With AFS our average funding times from application to wire were five to seven business days a few years ago. Now, most new-client contracts are executed in just three to four days from receiving the application & statements to wire.

    As the recent investments in technology begin to take hold and really manifest themselves in the operations of those who have large enough data (previous contracts to analyze) and who made the capital investment, expect a continuance of dropping default rates.

    Who Wins?

    As with most market maturations the end winner is not only the few big boys that end up on top, but the end client is the BIG WINNER! Historically, an average cost of funds to a small-business owner on a six-month repayment is roughly a 0.28; and the clients all do the math and know that its very expensive money. As the above takes place I predict that most of today’s MCA clients (not the high risk stuff) will start to see rates below 0.20 for the same turn time; while still paying out reasonable commissions to their sales partners.

    Those of us who have personally sold the product know that effective rates in the 30 percent range are extremely palatable to small-business owners. When these predicted rates start to take hold in the market place adoption rate of our “unsecured financing” products will continue to gain mainstream momentum and snowball, further driving growth of the large players and then further reducing costs.

    How will the consolidation affect the sales channel? More on that next time…

    By: Scott Griest
    CEO of American Finance Solutions
    Become a partner


    Publisher: DailyFunder
    Comments 3 Comments
    1. Capital Stack's Avatar
      Capital Stack -
      Welcome aboard Scott!

      On behalf of the community , we appreciate you input.
    1. Chambo's Avatar
      Chambo -
      The “for profit” funding companies....ha! Bravo!
    1. Sean Cash's Avatar
      Sean Cash -
      lol I didn't even notice that Chambo.


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