http://www.inc.com/ami-kassar/the-lo...fast-cash.html
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The issue is that Ami is saying its the borrowers choice...a lot of the people that apply for an MCA are just not credit worthy of a 5 year term loan...the way he is writing the article it sounds like the merchant has a choice between a 5 month 135 FR and a 5 year term loan and he is choosing the MCA
But if he had a choice - go long always?
I would argue that there are times for certain conveniences i overpay for milk, but i stop on the way home at a gas station, and do not have to waste time at publix.
of course if the merchant has a choice between a 5 year term loan and an MCA always go with the 5 year deal...I would guess less than 5 % of MCA merchants would qualify for a bank/term loan
I would say that less then 5% of MCA deals that you look at, but i would not say less than 5% of all DRP (Daily Remittance Platform) deals are, and monthly payments and longer turns can pick off the top and most profitable customers from a portfolio, and to come up with some reasons short money is good, may not be a bad idea.
Well since the article seems to be directly aimed at something I wrote, I'll just copy and paste the original point I made.Quote:
Originally Posted by nwarshaw
"As short term business lending critics herald the emergence of 3-5 year term business loans, I think it’s important to remember that they are catering to a market that likely has different goals. Long terms are often not appropriate for borrowers with working capital needs."
Go long always? No. Go long if it really makes sense. Would I borrow 10k over 5 years to buy inventory today? Definitely not. I'd want in and then I'd want out. Obviously I'd weigh the costs of all my short term options so long as they were all short term.
Sometimes critics don't believe this argument because they think we don't actually know what it's like to be in a business owner's shoes. A lot of people on this site run businesses or have run them in the past, myself included.
As a magazine publisher, I can't see any reason to consider a 5 year loan. Any talk of something of that length would be a non-starter for me. I have no desire to start writing in payments owed in the year 2019 on my calendar.
Given the scenario that a business owner does have a choice between these two options, realistically a traditional bank loan would cost less. However, the short term advance has several things working in it's favor that the bank loan couldn't provide. Availability of funds within just a few days aside, the fact that most of the risk lies with the funder is a huge boon for the business owner. In addition to that, the fact that given business remains steady or increases, the client could fit ten six-month terms into the same amount of space as the 5 year loan, effectively making ten times the amount of money available in the same five year period. In comparison, the bank probably could not extend a $500k loan over a five year term unless there was a lot of collateral to use, and even then they might be weary. While obviously the actual cost of money goes to scale, the larger amount of funds provided allows for more business growth at a faster pace (given that the client could actually use that much money).
Comparing MCA/ACH deals to a 5 year term is a bit of apples to oranges. If you qualify for a term loan and are worried about duration then just select a 2-3 year option and save even more. This assumes of course that a business owner qualifies for a term loan. As Isaac just posted, very few clients in our space qualify for a term loan. I think 5% is actually generous.
Even if they do qualify and take a 5 year term loan, 5 years is a long time. And short term cash needs pop up constantly. So when the next need arises and the client can't get another term loan, they move right into our space for funding. Comparing the 2 products doesn't make a whole lot of sense. The products serve 2 different needs and classes of borrowers.
1st, guys - I am not talking about a bank loan, Alternative lenders are here and more are coming with longer 5, 10, 15 years turns, low to mid cost, monthly payments, but underwritten from a speed, documentation, and on line perspective.
Sean - thank you for the response. I 100% agree.
There is becoming Alternative Lending products, not based on industry, but based on need.
- Emergency guy
- Opportunity guy
- working capital guy
- big project guy
- start up guy
- insurance guy
It is a fantastic evolution to watch and be part of
Nathan, I've spoken to a couple of the new alternative lenders. Their underwriting is much closer to a bank than MCA (and it should be with longer duration portfolios). Not as tight of course but still eliminates the vast majority of who we deal with. I don't even think of them as competition to be honest.
One issue I had when being solicited was a really weak comp plan and the fact that they won't allow us to fund any short term deals because it was strictly prohibited in their contract. It seemed naive to me. Not that I was going to load them up with new deals and then fund the clients anyway. I had no interest in their services. It seemed naive because the BD reps seemed completely unaware of the stacking bonanza going on. They felt that their paper was secure from layering because of contract language and a "better" class of borrowers. Does anybody really believe that?
I think there is definitely a place for 2-5 year term stuff in the alternative lending space. No doubt about it. But it's a ripe product for performance problems from rampant layering and at much higher risk for micro and macro economic conditions. With mid teen WACs and 3+ year WAMs things can go awry pretty quick. We'll see how it all plays out over the next couple of years.
The majority of the merchants that apply to us have a sub 600 fico score...I do not believe I know of any funder out there aggressive enough to give a sub 600 fico merchanr a 1 year plus term
Agreed
Finance1 - parameters loosen with time, larger portfolios, renewals, etc. I am not talking about tomorrow, I am talking about us all getting a longer run at this. Remember CAN's criteria back in the day, then through the credit crisis, and now. A lot changes.
Comp Size - comp size is relative to deal size and actual revenue brought in. For example a merchant does $30,000 in gross - the MCA provider pays you 8 points and does a $30,000 deal, gets you $2,400. The long ball player gives the same merchant $75,000 and pays you 3.5 points and gets you $2,625.
The actual comp problem is not the upfront, but it is the fact that you will not get near as many renewals and you have to have your ISO or Funder live for a long time before they ever see renewal rev.
I am not sure I see the same stacking problem, just like BofA does not now. Meaning once a guy gets a taste of 5 and 10 year monthly payments, does he really stack on short term expensive money. Maybe, but again looking at it from a funders point of view, the top 20% of your merchants makes you 80% of your revenue. They pay, they pay on time, and they come back. What happens if a funder loses a group of these merchants.
Isaac - CashCall would do that deal all day long and go past 1 year. regulators are squeezing the Title and the Payday space, those folks with that kind of money are not just going to walk away, they are going to take their automation, their version of risk, and apply it to our space in different ways that we should think about.
Just playing Devils advocate for thought
Cashcall absolutely has longer terms and has a once a month payment, they are very expensive but when you are going out 12/14/36 even 60 month you need to price in a much higher default rate
So that model may be in-line, but you can pay it off with no penalty, it is cashflow better for you now, our payments are only x compared to.
So what if a funder advertised directly to the merchant and that was the actual client they were looking to serve, could the ISO get marginalized
that's the question...funders have been trying to do away with isos for as long as I can remember...of course without an iso in the middle their margins are significantly better
Maybe - Maybe not
I would say, I bring on an ISO and I pay him 8 points and he goes and finds the merchant. Or, I drop 8% into marketing combined with inside sales and we go direct.
I could go on and on for both sides of this and at the end of the day, we need both and a good blend of distribution channels.
I don't disagree with you Nathan but I think I see the industry differently. CAN basically owned it before and during the credit crisis. But all that changed from competition. I think the longer terms and lower rates were by force and not by choice. New Logic was born because of market share loss to OnDeck. Those 2 have been fighting each other for years. Terms keep getting longer and rates keep getting shaved. Other big companies like MCC were forced to roll out premium programs with longer terms to protect market share. I'm sure none of them like it but they had to do it or shrink. The big question mark is the effect on margins for companies offering longer terms/premium rates. They definitely don't like to talk about it so we'll never know until someone goes public.
I'm not sure I agree with top 20% making 80% of revenue. I think it's the other way around. 80% of accounts perform well and 20% will have some sort of issue including slow pays and defaults. At least in our portfolio that's typically the case.
As I said before i don't think the alternative long players are in much competition with the MCA/ACH world at all. I also think they may have a hard time finding enough in between bank/mca quality to fill their portfolios. I've been doing this for over 4 years and run into very few who would qualify for the new players. Definitely some viable candidates but not many and not often.
As far as stacking goes, anybody will stack when they need money. Including the premium type clients. I've seen it plenty as I'm sure everyone else on here has. Those 12-18/mo deals with NL and OD are quite ripe for it. And these are high 600 to low 700 score clients. Just ask IOU. OnDeck may end up having to buy IOU to protect their own paper. 2-5 year deals are even more ripe IMO. I think it's good that these products are re-entering the market because they are very much needed but I don't think they will be insulated as much as you do from what we are already seeing.
BTW- the 2 firms I talked to about longer terms paid 1-1.5 pts max. PM me the one who pays 3.5. That's a workable #.
I think I see that exact type of scenario playing out again, except i see it playing out with a 3-5 year player(s), and CAN and On Deck going longer and cheaper and looking for ways to cut cost.
I do not think they are today, but they will/may be in the future, and if you are right and they do have a hard time, then much easier to go down on turn then extend turn, so then they truly do become competitors?
Sending PM
@Sean- I don't think I'm alone in wanting you to invite Ami Kassass to interview in the next issue of DF, go all Bill O'Reilly on him and put him in his place. It really is an Apples to oranges comparison. I guess the Funders in our space aren't paying him enough so he's on a seek and destroy mission.
@ Nathan PM me. We occasionally do get Merchants better suited towards long term loans and I would have no issue sending them your way
Hi JSL23 - My name is actually Ami Kassar - I didn't want the invitation to get lost in the mail
Hi everyone - Ami Kassar here - I see my post triggered a bit of a discussion. I accept the idea that not everyone who can get a six month product can get a five year term loan. Not's not really the point. IF you are eligible, I don't think there is a rational argument in the world as to why you wouldn't take the 5 year option. It's not like paying 25 more cents for milk at the convenience store. The delta in cost is significant, and in today's world the extra effort is little to none.
So as the borrowers figure this out (which they are starting to do) it's going to create a significant adverse selection problem for the entire MCA and "daily funder" industry that should keep you guys up at night. So my question is, how are you going to adjust to deal with it ?
Ami get real you'll still be peddling Mca.
MCA's and daily funder products are less than 5 percent of our business. We offer them to clients when there is no other choice. It's our option of last resort. So I am pretty real @cashguy
Hi there Ami! I do not work for, or contribute to "Daily Funder" but as a reader of the magazine and someone who frequents the site, I think it would be great if you do an interview in the next issue. I have read a few of your blogs and think they are extremely one sided and omit several facts.Quote:
Originally Posted by amikassar
If the MCA/RBL sector made up 30%+ of your clients, I am pretty sure we would get slightly more favorable reviews.