January 2014 – Issue 1

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Finding alternative distribution chains, and not just relying on ISOs to promote cash advance products to merchants, is also a strong differentiator, Gurandiano said. “The general knock on merchant cash advance has been that they are an ISO-centric model,” Gurandiano said. “Merchant cash advance was a rounding error that added to a typical sale of credit card processing.”

Gurandiano said that the problem with that model was that a different underwriting process is needed for businesses getting merchant accounts, and getting a cash advance.

But the bottom line is that regardless of the other fundamentals, a good MCA firm must also show strong profitability, McGovern said.

“If someone is profitable within a year, OK. But if we are looking at a year, and we are still not at positive EBITDA, this might not be the time for a capital raise,” McGovern said.

At a minimum, strong cash flow is a must.

“Private Equity guys really focus on cash flow,” McGovern said.

All the insiders agree that a true investment in technology is essential – and it needs to be much more than just a basic website.

An example of what potential investors may be looking for would be automated underwriting. Can you push a button and tell whether a particular Subway franchise in Florida that has been in business for three years is a better risk than a Subway franchise in Chicago that has been in business for two years? What are their default rates?

Analysts say that if you can’t tell which is a better risk by pushing a button, rather than just going by intuition, then you are don’t have the technology platform required to move on to the next level of funding.

The other shoe
Most people agree that one way or another, consolidation of MCA firms is inevitable. One possible route is going to be through mergers and acquisitions – with some more blockbuster deals inevitably shaking out.

“I could see more deals going down, sure. The number of merchant cash advance companies out there has tripled in the last year from 50 to 150 today,” McGovern said. “ There is still plenty of money chasing deals.”

But analysts say the market is going to thin out in other ways, too.

With technology playing such an important role, the leaders with the most scalable platforms will likely distance themselves from the less tech-savvy companies, capturing their market share in the process.

“Technology is creating a real opportunity to reinvent this industry,” Cox said. DF

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