It was based on credit card sales, flowed through a merchant account, and was topped off with a more or less universal factor rate of 1.38. It was expensive because it was risky.
Fast forward
Using various sources, I estimated that approximately $524 million worth of merchant cash advance transactions took place in 2010. That figure was cited in many publications and used repeatedly as a benchmark of where the industry stood.
Some folks believed it to be absurdly low, yet I found that mostly because our definitions of what constituted a merchant cash advance was different.
The merchant cash advance product, if there really is such a universal thing as one anymore, constantly evolves. At the time I put out that number, I wasn’t including transactions structured as loans or deals that relied on ACH processing for repayment. I limited it to purchases of future card sales captured via split-processing. In 2014 that would be an incredibly narrow scope.
Over time, some funders became lenders. Others began to purchase all future sales instead of just card sales. Deals got longer and shorter while costs both soared and diminished. New terms were invented and lines were drawn in the sand. Spawn from the same mother, a handful of funders desperately tried to shed the stigma of merchant cash advance and furiously distanced themselves from it in their marketing.
“We are NOT a merchant cash advance company.”
Even though they were yesterday.
In biological taxonomy, merchant cash advance is a phylum. It encompasses a diverse hierarchy of classes, orders, families, genera, and species. Almost two years ago, I published Merchant Cash Advance Redefined (March 2012) on Merchant Processing Resource to describe the changes that were taking place. Even then it was clear that the industry was becoming less cohesive. “MCA is simply becoming synonymous with short-term financing,” I wrote. We were going full circle, devolving back into the pre-2005 era when nobody knew what to call what we were doing.
I honestly thought the term itself was on the verge of extinction. In one of the most widely read Merchant Processing Resource articles of all time, The End of an Era (September 2012), I actually went as far as to predict that nobody would be using that term anymore at all by 2015.
But just last month in December, Renaud Laplanche, the CEO of Lending Club, used the term in testimony given before the House of Representatives. (Starts about 19 minutes in) It is believed to be the first time it has been mentioned in a congressional hearing. With recognition on such an important stage, I have a feeling now that it won’t be going away anytime soon.
So if merchant cash advance lives on, what is the industry? One of the last universally identifying characteristics of a merchant cash advance is the daily capture of funds. Whether it’s the withholding of a percentage of card sales or a fixed bank account debit, funders are collecting payments just about every business day. Contrast that against loans with monthly payments and it doesn’t take carbon dating to distinguish a traditional loan from a merchant cash advance.
It’s no coincidence that this publication is duly named, DailyFunder. Merchant cash advance companies are daily funders. Structure a transaction however you want so long as every day is a payment day.
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